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Introduction to Understanding China's Economic Indicators

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In this introduction to his book, Thomas Orlik explains what China's statistics say about the state of the economy and how to use them to make more profitable investment decisions.

The Crush

It's a freezing January morning, and a group of 80 or so journalists file past a bored adolescent security guard into the marble lobby of a government building in the center of Beijing. Passing through the lobby, they head up a flight of stairs and show their IDs to another security guard before passing through an airport-style metal detector. They file into a conference room with rows of chairs facing a raised platform, at its center a microphone peeks out through an impressive array of flowers. They huddle in small groups, sipping coffee and talking shop. One member of the Chinese press cleans out his ear with the nail of his pinky finger, cultivated especially long for the purpose. At 9:45 a.m., the door to a side room swings open and a nervous official appears holding a stack of papers. The official is nervous for a reason. Suddenly energized, the journalists surge forward, elbowing each other aside to be the first to see the contents of the papers. The unfortunate bureaucrat is knocked this way and that. The melee continues until her hands are empty. Why all the fuss? Is the Chinese government renouncing its ties with the despotic regime in North Korea? Granting independence to Tibet? Providing the secrets to roasting the perfect Peking duck? No. The 80 men and women are financial journalists. The hapless factotum they have just mobbed is an employee of China's State Council Information Office. The papers they now triumphantly hold in their hands contain the figures for China's gross domestic product (GDP) in the final quarter of 2009.

It is now 9:50 a.m. The journalists have opened their mobile phones and are calling in the numbers to their colleagues in news rooms around the capital. GDP has grown by 10.7% year on year in the final three months of 2009, up from 9.1% in the third quarter. China has emerged first and strongest from the worst economic crisis since World War II. But alongside the news of surging growth comes something more troubling. Inflationary pressure has returned, and sooner than expected, to the Chinese economy. Consumer prices rose 1.9% in the year to December, up from 0.6% in November. Food prices increased even more, up 5.3% compared to a year ago. The journalists have a few short minutes to make sense of it all. What is the news? Will surging growth send the Shanghai Composite Index, the price of a barrel of oil, and the value of the Australian dollar and the Korean won surging upward? Or does the return of inflation signal the end of the good times? The journalists call in their numbers to colleagues at the newsrooms of Dow Jones, Market News International, and Reuters. There's a minute of frantic checking and rechecking of the numbers. "GDP grew 10.7% in the fourth quarter and 8.7% for the year as a whole, right?" A pause. "Right." At 10 a.m., the embargo on broadcasting the news is lifted. In trading rooms in Shanghai, Hong Kong, Tokyo, Taipei, and Singapore, screens light up with the data. In the State Council Information Office, a group of gray-suited officials has filed onto the platform, and the press conference begins. Ma Jiantang, the smiling head of the NBS, starts to read from his prepared statement. "You could say 2009 was a good harvest for the Chinese economy," he says. But financial markets aren't listening to his statement; they're already trading on the data.

In China, the Shanghai Composite Index is flat. At first sight, this is something of a mystery. If growth is on track, it should be good news for equities. Investors should be rushing to buy, not standing by indifferently. But the markets are thinking not just about what the data says about the state of the economy, but also about how the government might react. With growth on track but inflation rearing its ugly head, the markets fear the stimulus party might be drawing to a close. The Shanghai Composite Index fell almost 3% the previous day, on the suggestion that banks would tighten their lending. A higher-than-expected reading for growth and inflation heightens concerns that the end of the stimulus is near. The biggest potential losers from a tighter policy stance—companies in the banking, property, and commodities sectors that benefited from a lending- and investment-driven 2009—start to fall. On the Hang Seng Index, Industrial and Commercial Bank of China, the world's largest bank by deposits, falls 2.9%. In Australia, iron ore miners BHP Billiton and Rio Tinto fall 1.7% and 3.2%. The Aussie loses 1.1% against the greenback. In New York, it is still 9 p.m. on January 20, and the markets are closed. Investors have a night to sleep on the data. When they wake up on January 21, they will find that markets across Asia have fallen. Higher inflation, not faster growth; the end of the stimulus, not the beginning of the recovery—those were the main takeaways from China's economic data. The day after the release of China's GDP data, the Chinese tail wags the U.S. dog and the Dow Jones Industrial Average falls more than 2%.

Back in the State Council Information Office, Ma Jiantang has finished reading from his statement and it is time for questions and answers. The first question comes from a representative of China Central Television: "Has the Chinese economy now overtaken that of Japan to become the second largest in the world?" Mr. Ma smiles while a functionary reads the question again in English for the benefit of the foreign journalists. "As to where China's economy ranks in the world, experts and scholars can do their own research," he says. "But the reality is that China remains a developing country, and on a GDP per capita basis, we are not even in the top 100 countries in the world." The average Chinese person might be pulling in just USD4,000 a year. But 1.3 billion people earning not very much still adds up to a lot. In 2010, China's GDP totaled CNY39.8trln, equivalent to USD5.9trln. In the world GDP rankings, China overtook fourth place Germany to move into bronze medal position in 2007, and in 2010 outstripped Japan to claim the silver. China might not yet be number one—and might not be number one within the next decade. But China moves markets. The mainland's own equity markets are moved more by the story of growth and inflation told by the economic data than they are by the profit and loss of the companies listed on them. Mainland firms make up more than 50% of the Hang Seng Index, and the Hong Kong markets move in tandem with the mainland. Regional markets in Japan, Korea, and Singapore rise and fall with news of the economic fortunes of their big neighbor, and major news can move markets in the United States and Europe. China is the world's biggest consumer of iron ore and copper, and the second largest consumer of oil. Commodity investors pore over China's import, industrial value-added, and fixed-asset investment data for signs of changes in its appetite. The drama of yuan appreciation is the focus of attention for the foreign exchange markets. A capital account that remains closed to speculators limits the scope for betting on the yuan, but the Korean won, Singapore dollar, and Australian dollar are traded as proxies for yuan appreciation and the China growth story. The eyes of the world's financial markets are focused on China, and the lens through which they see it is China's economic data.

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