China has released a spate of good data which on the surface give a sense that the economy is turning around and everything will be fine. However, if you look at the data in very straightforward ways, you can quickly see that the data is revealing significant underlying weakness. Today rather than focusing on China, I am instead going to use China as the case study of how we need to analyze economies.
- What is the trend? Too many people will focus on a one month number and less about where does that number fall around the trend of previous months. Economic data is noisy and most of the time simply bounces around a clear trend. Just because it bounces above the trend in one month, does not mean the trend has reversed. The trends with regards to China are obvious and need no revisiting but the key issue is that it is only normal that in some months, the data is above the trend line. Take a simple example, if we believe the “rebalancing” story, which has more holes than a fisherman’s net, this absolute requires a long downward trend in roughly 50% of Chinese industry. There may be short term data around that trend, but that trend is a long term structural shift and we would be advised not to read too much into month to month or quarter to quarter changes. Most every time people call some type of turnaround, plot the data and you can see that it is really just a bounce to slightly above the trend.
- What is the number measuring? Sounds a little simplistic but it is very important to make sure that the number being used is properly understood. As a simple example, joining forces with the previous point, many are rejoicing at the March trade data. However, as China Beige Book so rightfully notes, the “bounce” was not a bounce at all after accounting for the previous years decline to the base and when considering the year to date numbers. Year to date for the first quarter, Chinese trade numbers continue to decline. As another example, the trade surplus measures the declared value of products at customs. Officially China ran a nearly $600 billion goods trade surplus. However, that measures the “declared value” not the cash transfer value.
- Put numbers in perspective. Many times people get excited over headline numbers and forget to put numbers in perspective. Let me give you two examples. I think Chinese GDP data is completely unreliable, however, in most ways it doesn’t matter. GDP is meaningless value to the man on street who pay their bills with cash. Revenue across corporate China is essentially flat for quickly approaching about two years now while liabilities continue to grow significantly. So for instance, while people say GDP is healthy, the key number of cash available to repay those debts is actually behaving very differently. As another example, that thankfully many journalists and specialists picked up on is that Chinese bump in FX reserves was all about EUR strengthening against the USD not a decline in outflows. Outflows remained right on trend. Whenever you see a Chinese number, stop and think what is this number really telling me?
Sorry for the short post today been travelling in Beijing, Shanghai, and about to leave for Hangzhou before returning back to Shenzhen. I’ll have some interesting slides to post in the next couple of days.