Introduction to Understanding China's Economic Indicators

By Thomas Orlik

Date: Jul 20, 2011

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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.

How Reliable Are China's Economic Statistics?

With so much attention on developments in the Chinese economy, the reliability of China's economic indicators has been the subject of some controversy. In the popular imagination, the production of China's economic data is regarded as a crude political farce: the controlling hand of the Communist Party intervening arbitrarily to direct the level of key indicators before they are published. In the past, that image was not too far from the reality.

In the Great Leap Forward, Chairman Mao's disastrous attempt to shift a backward agrarian economy to a modern industrial economy in a few short years, the failure of the statistical system contributed to catastrophe on a grand scale. Mao's plan to accelerate the development of the economy required producing an agricultural surplus that could be sold to fund investment in a modern industrial base. Whipped into a patriotic frenzy, and knowing that their future depended on meeting unrealistic targets for the production of grain, local officials engaged in rampant falsification of data. At the height of the insanity, in summer 1958, some provinces were boasting annual output of 10,000 pounds of grain per mu. Those numbers were already crazy. A mu is 1/15 of a hectare, and in the 1950s that area of land could be expected to produce around 1,000 pounds of grain a year. But even these bloated reports were soon surpassed by other provinces claiming output of 20,000 or even 30,000 pounds per mu. The point of the production data was not to reflect reality, but to generate the good news required to support morale among comrades and meet the unrealistic expectations of the higher-ups. But reality is distorted at a cost. The higher the production figures, the greater the tax owed to the central government. In some provinces, the exaggerated claims were so great that the entire harvest had to be handed over as tax, used to fund investments and extravagancies that China could ill afford. In some parts of the country, the only crops left behind were grown by villagers in secret locations, away from the acquisitive eye of the local production teams. But such success stories were few and far between. Tens of millions died in history's greatest man-made famine.

That was 50 years ago. Some things have stayed the same in the last 50 years, but a lot has changed. At its heart, the cause of over-reporting output during the Great Leap Forward was the divided loyalties of local officials, torn between the reality of stubbornly unchanging grain yield and the dream of career progression that depended on meeting unrealistic targets for output. That conflict of interest was slow to be resolved. The biggest reform-era controversy over China's economic data, a GDP growth figure for 1998 that many experts regard as grossly inflated, has been laid at the door of the exaggerated claims made by local officials. But NBS headquarters in Beijing is no longer reliant on the unreliable inputs it receives from local bureaus. Across the key industrial output, fixed asset investment, and retail sales data, the largest enterprises in the country report directly to the NBS in Beijing. Where there is a conflict between local and national data, the NBS typically resolves it in favor of the reliable national figures. The GDP data is a case in point, with the national total announced by the NBS consistently below the sum of the GDP reported by the provinces.

The second problem that bedeviled the grain data during the Great Leap Forward was the belief that boosting morale through exaggerated claims was more important than reporting reality. The audience for China's economic data might have expanded beyond the agricultural workers of the 1950s, but the numbers continue to play a role at home and abroad in buoying confidence in the China growth story. The magic 8% figure for GDP growth, in particular, has an almost talismanic significance. But if the government is ever tempted to play fast and loose with the statistical reality, there are also forces pulling in the other direction. The Information Age has reduced the scope for the use of economic data as an instrument of propaganda. Official data is available instantly around the world over the Internet. A horde of sophisticated and cynical journalists, spreadsheet-wielding economists, and hard-nosed investors are following developments in the Chinese economy. The extent of the 1950s famine was revealed only by demographers poring over the population data decades later. If an inconsistency arises today, a lot of people will know about it very quickly. The fact that the NBS was happy to announce GDP growth of 6.1% year on year in the first quarter of 2009, the lowest level in a decade, suggests that the powers-that-be realize that the benefits of supplying credible official data are greater than the costs of reporting an unwelcome reality.

Measuring a rapidly changing economy remains a challenge. One of the problems of the Great Leap Forward was that China's leaders were blinded by a belief in their own hocus-pocus technology. Mao genuinely believed that revolutionary fervor plus new planting techniques could result in massive increases in grain output. Changes in production techniques made it more difficult to measure output, or at least obscured for a time the fact that output was little changed. The dislocations of reform-era China might be less wrenching than those of the 1950s, but the mainland is still changing fast. The economy is many times larger today than it was in 1978, new sectors are driving increases in output and employment, new products are entering consumers' shopping baskets, and new property is coming online in the housing market—keeping track of developments is an enormous challenge. In some areas, the NBS has made an effort to keep its measuring tools sharp and clean. To keep track of GDP, the NBS has expanded its survey from a primitive 16 sectors to a more respectable 94 and has significantly improved its coverage of the services. But in other areas, surveying tools and techniques have been slow to adapt to a changing reality. Consider China's creaking system for measuring developments in labor markets. In 1978, 100% of the workforce was employed in the state sector, and a survey based on wages in state-owned enterprises worked well enough. In 2010, that number was less than 10%, and a wage data survey that continues to focus on a privileged subset of state-sector workers makes little sense. Survey tools that lag behind the reality of a changing China are a more serious problem for China's economic data than political interference.

A recalcitrant population continues to add to the problems. The NBS is not the State Administration of Taxation or the Public Security Bureau. But a culture of deceit among Chinese people when it comes to dealing with officials of any kind makes it difficult for the NBS to collect solid baseline information. In the Great Leap Forward, peasants growing crops outside the greedy gaze of the local production team distorted the data. Fifty years later, the problem is small businesses that keep three sets of books—one for the taxman, one for investors, and one for themselves—or rich households that refuse to disclose the income they receive from graft. The problem of a sample set that is incapable of telling the truth to anyone in an official badge remains, and that adds to the difficulties the NBS faces.

Finally, the NBS and other arms of the government charged with the production of China's economic data do themselves no favors by treating straightforward information on methodology with a degree of secrecy more suited to guarding the location of nuclear weapon silos. Transparency on the methodology underpinning key data points has improved considerably from the situation a few years ago. In 2010, for example, the results of a new effort to measure wages in the private sector were published alongside details of the survey approach and a discussion of some of its limitations. But crucial details of the methodology on key indicators are still kept hidden. The weights of different components in the consumer price index (CPI), for example, are public information in most countries and enable an easy check on the reliability of the official data. In China, the NBS does not disclose the weights, making it impossible to verify if movements in the index represent changes in prices or changes to the calculation method. Partly as a result, confidence in the CPI data is so low that, in some months, the rumor in the market before the release of the data comes in two parts—one on the real level and one on the level the NBS will announce. The statisticians do not have an enormous fund of good will and faith in the official data to draw on. By withholding key details of how the data is calculated, the NBS and other institutions raise doubts, perhaps unnecessarily, about its reliability.

The reality of China's economic data today is not the crude controlling hand of the Politburo dictating the GDP growth figure. It is an increasingly reliable and comprehensive set of economic indicators that remain compromised in some areas by the difficulty of measuring a rapidly changing economy, imperfect surveying methods, a recalcitrant sample set, and continued political sensitivity surrounding some numbers. The system is not perfect. Some data points are more reliable than others. But neither is it a farce. As shown by the mad scramble for the GDP data in the State Council Information Office and the billions of dollars that are traded instantly on its release, the shortcomings in the data are no impediment to the market reaction.

A Month in China's Economic Data

Most months in the Chinese economic calendar follow the same pattern of data releases, and a glance at the schedule for a typical month provides a way to highlight the more important data points.

The exceptions to the normal monthly pattern are at the beginning of the year and in months when the quarterly GDP data is published. In the beginning of the year, the NBS delays the publication of data on industrial value added, fixed asset investment, and retail sales for the first two months until March, to smooth out the effect of the Chinese New Year. In months when the GDP data is published, the NBS delays the 11th-of-the-month data release to coincide with it. That normally means publication on around January 20 for the fourth quarter GDP data, and April 15, July 15, and October 15 for the first, second, and third quarter data.

Waiting for Release of the Data—or Not

The regular monthly calendar is a way to keep track of what data is released when. But in China, not everyone is waiting for the official release to see the data. Economic data and information on key policy decisions are often in the market days ahead of the official announcement. If the markets latch on to a credible rumor for an important data point, the reaction can happen ahead of the official release. Important information leaks into the markets in several ways:

It adds up to a messy and confusing picture, with insiders benefiting from advance information and everyone else chasing rumors. For foreign investors, the chance of being out of the loop when decisions or data are leaked is one of the frustrations of working in the Chinese markets.

A Year in China's Economic Data

Chinese holidays (some of them fixed, some of them floating), political set pieces, and changes in the season affect what is happening to the data. Keeping an eye on the calendar makes understanding what is going on easier.

January and February: New Year's Holiday Plays Havoc with Data

Chinese New Year is the main event in the annual calendar, the equivalent of Thanksgiving, Christmas, and New Year's Day in the United States rolled into one, but stretched over an entire week. Airports and railway stations are packed with workers returning home for the most important holiday of the year. Work on construction sites grinds to a halt, factories cease production, and the financial markets are closed. With the New Year falling in January some years and February in others, the calendar plays havoc with the economic data. The NBS attempts to overcome the problem by publishing some of the main data points for January and February together. Data that is published for separate months, including data on trade from the Customs Bureau, needs to be treated with caution because of the seasonal distortion.

The holiday also impacts the financial markets. With households hungry for cash to pay for train tickets and to stuff into red envelopes as gifts for family members, and firms demanding extra funds to pay a New Year's bonus, the banks run short. Short-term interest rates kick up, and the PBOC injects liquidity to make up the shortfall. Throw the chance of very bad weather impacting economic activity into the mix, and data for the first two months of the year needs to be treated with caution.

March and April: Twin Work Meetings Set the Direction of Economic Policy

With the New Year's festivities over, March's main event is the government's twin work meetings. In theory, the National People's Congress (NPC) is China's highest authority. In practice, key decisions are shaped by a smaller group at the October meeting of the Communist Party's Central Committee. That does not mean the NPC is without interest. The premier's work report sets out the government's overall economic policy stance and the priorities for the year, including a target for GDP, CPI, and money supply. The National Development and Reform Commissions (NDRC) expand on that with targets for trade, fixed asset investment, and retail sales. The budget sets priorities for government spending and the target for the fiscal surplus or deficit. The Chinese People's Political Consultative Conference is second fiddle to the NPC, but it takes place in parallel and provides the financial press with a rare opportunity to doorstop decision makers and ask them difficult questions.

In April, following the confusion caused by Chinese New Year, GDP data for the first quarter brings some welcome clarity on the state of the economy. Publication of the GDP data is typically preceded by a meeting of the State Council, chaired by the premier and with all the main economic policy actors in the room. The State Council reviews the economic data ahead of its publication, agrees on the direction of economic policy for the quarter ahead, and sometimes makes decisions on the use of key policy instruments such as the interest rate. In April 2010, the State Council meeting resulted in the announcement of a crackdown on bubble prices in the real estate sector.

May and June: No Rest for the Workers

Until 2007, workers enjoyed a week-long holiday in May. From 2008, that was reduced to a single day, on May 1. The change from a week-long to a single-day holiday affects the seasonal pattern in the historical data, and the 1-day holiday continues to reduce working days in May relative to April and June, which can have an impact on the month-on-month data.

July and August: Political Slumber and Natural Disaster

Beijing summers are hot. The temperature pushes up into the high 80 degrees Fahrenheit. In the Deng Xiaoping and Jiang Zemin era, China's leaders sloped off to Beidaihe, a nearby coastal resort, for a few weeks of swimming and political intrigue. Hu Jintao decided that an annual holiday for the entire leadership did not fit with the image of simple living he wanted to project, so the Beidaihe retreats fell out of favor. But being in Beijing does not appear any more conducive to making difficult decisions. The publication of GDP data for the second quarter in early July is preceded by the normal meeting of the State Council. But in general, the summer months are not heavily populated with major political or economic events.

Natural disasters are not confined to the summer months. Snowstorms in the winter and earthquakes anytime they please have claimed lives and treasure in recent years. But the summer months are particularly prone to natural calamities. Floods can damage infrastructure and put a dent in output for the industrial and agricultural sectors. July 1 also marks the date of the founding of the Chinese Communist Party in 1921, a sensitive anniversary.

September and October: National Day Holiday, Central Committee Meeting

The moon festival in September or october and National Day at the beginning of October introduce further confusion into the economic data. The fall holidays are not as important as the New Year's festivities. There's no exodus of migrant workers from the factory back to the farm, construction continues, and shops stay open. But the two holidays put a significant dent in working days, especially for white-collar workers, and affect the economic data for September and October. The National Day Holiday on October 1 is also the anniversary of the founding of the People's Republic of China in 1949.

In mid-October, a meeting of the Central Committee of the Communist Party brings together China's most senior decision makers. The meeting has assumed a new importance under the leadership of Hu Jintao as a forum in which important economic decisions are made. The October 2010 meeting came ahead of a decision to raise interest rates and anticipated a shift in economic policy out of crisis response and into neutral mode. The Central Committee meeting also sets the tone for the meeting of the NPC in March the next year.

November and December: Central Economic Work Meeting

In the first half of December, the main event is the Central Economic Work Meeting. With the president and premier in attendance, the meeting brings together senior leaders from central departments and provincial governments for 3 days of discussions. The meeting sets the tone for economic policy in the year ahead, identifying the overarching stance for monetary and fiscal policy, and setting out priorities for structural reform.

How This Book Works

This book is organized into chapters that cover different aspects of the economy; for example, the second chapter covers indicators of national output, and the third chapter indicators of investment. Within each chapter, there are sections devoted to individual indicators. The information on each indicator is organized as follows:

Market sensitivity: Is this a high-sensitivity indicator that always gets the attention of the markets (such as GDP or CPI), a medium-sensitivity indicator in which an unusual movement might spark some trading activity (such as fixed asset investment or retail sales), or a low-sensitivity indicator that does more to inform the market's overall assessment than it does to trigger an immediate response (such as nonperforming loans or yuan deposits in the Hong Kong banking system)?

What is it? This is a brief description of the indicator and what it measures, including the units in which it is published. Being clear about the units in which the data is published is especially important in China, because of the considerable variety of approaches and conventions that often differ from those used in the United States. The main points to watch for are these:

Chinese news release on the Internet: Where can you find the Chinese data release on the Internet?

English news release on the Internet: Where can you find the English data release on the Internet?

Release time: When can you expect the publication of the data?

Frequency: Is it a daily, weekly, monthly, quarterly, or annual indicator?

Source: Who is producing the data? This could be the NBS, PBOC, CFLP, Hong Kong Monetary Authority, U.S. Bureau of Labor Statistics, or someone else.

Revisions: Is the data subject to revisions (as with the GDP data) or not (as with almost everything else)?

Why is it important? Why do the markets care about this indicator, and what does it say about the Chinese economy?

How is the data calculated? Where does the data come from, and how is it put together? Are there any reasons—political or technical—to doubt the accuracy of the data?

Interpreting the data: What does the data release look like, what are the most important takeaways, and how should they be interpreted? If the data is typically published in a table, you can see a copy of it here, with labels indicating the key points, linked to explanatory notes. For tables that are published on a timely basis in English, the English table is shown. For tables that are not published in English, or published in English only after a long delay, you can see a copy of the Chinese table with the main terms translated into English. For some of the larger tables, some of the less relevant data points are left out. For example, in the table of China's imports by product (Table 5.4 in Chapter 5), the table includes imports of crude oil and iron ore, but not imports of pesticides or other smaller components of China's import bill. Data omitted from the original is indicated by an ellipsis in brackets: [...]

Market impact: What impact does this data release typically have on equity, commodity, and currency markets?