Saturday, May 23, 2009

A three dressed up as a nine?

If you missed the late updates, there was a total of three bank failures for the list yesterday in the US.

While the US economy may be lagging, much of the postitive economic news lately has been focused on China. Part of the recent optimism in world markets rests on the belief that China’s fiscal-stimulus package is boosting its economy and that GDP growth could come close to the government’s target of 8% this year.

A significant portion of the stock market gains in Canada have been premised on China's revival and their need for commoditites to fuel that growth.

Now it apears red flags are being raised on that optomism.

Concerns are appearing that all may not be as rosy as portrayed by Bejing. Some economists suspect that the Chinese figures overstate the economy’s true growth rate. These same economists are saying that Beijing would report 8% growth regardless of the truth.

Economists have long doubted the credibility of Chinese data and it is widely accepted that GDP growth was overstated during the previous two downturns. In 1998-99, during the Asian financial crisis, China’s GDP grew by an average of 7.7%, according to official figures. However, using alternative measures of activity, such as energy production, air travel and imports, Thomas Rawski of the University of Pittsburgh calculated that the growth rate was at best 2%.

The biggest adjustment seems to have been made in 1989, the year of political protests in Tiananmen Square. Officially, GDP grew by over 4%; while analysis shows that it actually declined by 1.5%.

China’s growth in the first quarter of this year has led some to conclude that the government is up to the same old tricks. According to official figures, GDP was 6.1% higher than a year earlier. Yet electricity production in the first quarter was 4% lower than it had been a year earlier. In the past, GDP and electricity output have moved broadly together. Given that power statistics are less likely to have been tampered with than politically sensitive GDP figures, is this evidence that the latter have been fiddled?

Then there are government tax revenues. These have fallen by 10% over the past year, compared with a surge of 35% in early 2008, suggesting that incomes and output have tumbled.

Abraham Lincoln famously said you cannot fool all of the people all of the time.

If the revival in China turns out to be less than it appears... can you guess how the Canadian stock market is going to react?



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