China Business Blog and Podcast

This just in: China is NOT the 4th largest economy in the world as we have all been thinking, reporting and generally drooling over.   The only three bigger economies, so we thought, were Germany, Japan and the U.S., in ascending order.  But that seems to be no longer the case…China is, in fact, the 3rd largest economy in the world.  The Chinese government just released the news that their GDP growth in 2007 was not 11.9% as originally reported; it was, rather, 13%.  And let me emphasize that, here we are in the first weeks of 2009 and we are now going back to 2007, a plot worthy of a Michael Keaton series revival if there ever was one.  What the … ?

Now, I am not economist.  Have never have claimed to be.  My grade in Macro Econ 101 was, I believe, the lowest ever recorded at a land grant university.  It was enough to make the teaching assistant responsible for the course, Ms. Gonzales, second guess her very reason for going into the discipline and whether or not she had a future molding young minds into an Economic frame (or at least a macro economic one).   To be the catalyst for such epistemological angst in another human convinced me that I can never fully understand the Beautiful Science.  So I comment on this story with more than a little fear that it all really DOES make sense, just not to me.  But I live in China.  I’m kinda used to that feeling.

But let’s just look at this like regular humans: you know, people with checking accounts, credit cards and, when we are desperate, actual cash.  Can I go back to my 2007 income and say, “Oops … so sorry … but it seems that I made a few trillion dollars more than I originally thought”?  And, like I didn’t notice that I was pretty flush back then, turning out my pockets before tossing the jeans in the laundry: “Oh, look, a wad of cash and executed U.S. treasury bonds.  Where did those come from?”  Financial assets were breeding like randy bunnies in the dark, I guess.

I am not surprised, however.  Financial accounting in China, though improving, is still more art than science (or maybe more science fiction).  Ask a Chinese company to show you their books and they’ll say, “sure, which ones?”.   Many companies here would be an easy runner-up in the race for the Enron Financial Noodling Award (pronounced “Effin-A”).  So the government declaring a do-over, Ollie Ollie In-come Free on their books is not shocking (but isn’t there some sort of statue of limitations on that kind of thing??  I’m just askin’…).  In fact, there were other so-called experts that felt that the growth was even higher than 13% at the time.

What is a bit puzzling is why they are choosing to release this information now.  The Chinese government is becoming much more sophisticated in the subtle manipulation of information foisted upon the public – certainly not in the rare-air of Rovian WMDs, but they are certainly playing triple A ball.  So releasing this information now has to have a reason behind it.  What could that be?  I think there are two possible motivations:

Firstly, I believe that if the final tally of 2007 would have come out at an official 13%, the Chinese government would have been in a situation where they would have had to defend against an accusation that the economy was overheating, that a come-to-Keynes moment was inevitable.  As it was, the government could look at the skyrocketing consumer, commodity and real estate prices in 2007 and say, “Um… no, its OK.  We are ‘only’ at 11.9% growth.  We’re cool.  Move along…nothing to see here.”  They could build a convincing story around 11.9% but felt they couldn’t around 13%.

Secondly, by releasing the information now, China gets the “bump” of suddenly becoming the world’s third largest economy – in your strudel, Germany!! – without paying any additional price for the much lower figure that is certain come out this year.  Think about it…the global media has been giving China the spanking of its life because it is “only” going to be growing at about 8% this year – I think, for much of the Western media, that’s just sour grapes, compensating for a performance anxiety because China’s 8% is still about 9% higher than what the rest of the world is going to be this year.  But if you are going to be “down” to 8%, you don’t get dope-slapped being down from 13% any more than you’d get for the gap from 11.9%.  The result from falling 23 stories and 33 stories is about the same – no one cares about the slight difference in air time.  So China gets the Bronze Medal in the Global Economy Para-Olympics by re-jiggering 2007, a subtle finger on the scales at the weigh-in before the race.

The practical result for me?  First, I am going to take any economic data from China this year with a grain of salt and two litres of wait-and-see.  I know this is frustrating for all the quant jocks out there whose neck hairs tingle at newly released data, but they should dump ice water down their shorts, take a seat and wait for the reruns, just like the rest of us.

Secondly, I am going to go track down Ms. Gonzales.  I think my Macro Econ 101 grade was quite a few percentage points better than she originally recorded…

This entry was posted on Friday, January 16th, 2009 at 9:30 pm and is filed under China. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.