More on the Fed, China, and Chinese Data
1.There is an argument being advanced that the Fed being concerned about emerging markets (read China) opted to hold off on raising interest rates. I actually disagree with this interpretation of events but understand the logic and reasonableness of the argument. I believe instead that the Federal Reserve Board looked at inflation and potential background pressures and opted to leave rates unchanged. While I personally would have voted for at least a 0.25% increase, even the most devoted inflation hawks have a tough time making the case that inflation is rising or the background factors are mounting to spur significantly higher inflation. In short, I believe the Fed looked at the US and doubted the size, strength, and speed of potential inflationary pressures existed to necessitate a rate hike. I mention all this because I want to pass on a market rumor I heard from a couple of unrelated people. The rumor as was told to me was that the August 11 devaluation was a warning shot to the Fed to keep rates unchanged or else the PBOC would let the RMB drop a lot more. I am not ready to believe it but at the same time, it isn’t easy to discard. Here is why. First, if China was hoping to use RMB devaluation to increase exports, 3% is not nearly enough to offset domestic and international currency pressures needed to make Chinese exports competitive. Second, despite China saying this was a move to introduce market pricing, virtually every day since August 11 has seen market pressures on pricing ignored. This was not about market pricing. Third, as I have noted numerous times, the biggest change was the introduction of fear into the RMB/$ peg. In short, as many people noted early on, any economic rationale for the PBOC action was weak at best leaving watchers with a puzzle to try and explain the movement. Again, this is just a market rumor that was passed on to me by a few people and I am passing it on to you.
2.I know one thing that is difficult for many to grasp, especially those who do not delve into the bowels of Chinese data, is why I am so skeptical of Chinese data. The simple answer is that the data is so obviously inconsistent because it does not reconcile to itself by a large margin. However, even trained China data watchers, especially those who believe the only thing wrong with China data is a lack of transparency, make this mistake. As a simple example, China data day dream believers will acknowledge questions about GDP data and then use other topline official data to demonstrate their point as if the NBSC will have any trouble massaging those data points. Even this data is obviously problematic. Let me give you an example I just discovered the other day that cuts directly to the heart of the argument that services are rebalancing the Chinese economy. In the monthly data at the National Bureau of Statistics China under the Postal and Telecommunications Services section, the Telecommunications Services is credited with year over year growth of 27% and accumulated year to date YOY growth of 23.2% supporting the shift to services argument. Pretty solid numbers. However, looking beneath the surface at the components of telecom services growth the numbers tell a radically different story. The YTD YOY growth in telecom component services reads as follows according to the NBSC: local calls volume fixed line including IP -12.6%, length of long distance calls of fixed line including IP -7.6%, length of call mobile telephone -1.9%, number of fixed line subscribers -6.5%, urban fixed line subscribers -2.7%, rural fixed line subscribers -15.1%, mobile telephone subscribers 2.6%, 3G mobile phone subscribers -4.7%, SMS services -4.7%, and broadband subscribers 4.6%. All these components produce an unweighted average growth of -4.9%. The underlying component results closely match the revenue results from China Mobile reporting 0.5% telecom services revenue growth (PDF) and China Unicom revenue growth which actually declined slightly 1H 2015 on a YOY basis. There are a few final points. First, I have absolutely no idea how the NBSC arrives at 23.2% YTD YOY growth when all the components are huddled around 0 with a few witness low to mid-single digit growth. I am not even going to guess. Second, this undercuts the argument that China is shifting to a services based economy. Third, firms do not live off of manmade GDP but on the revenue from selling those services and it is clear that firms are not witnessing the supposed rebalancing or GDP growth in services the NBSC and perma-pandas believe exists.
3.Many perma-pandas that argue GDP data is accurate have also tried to argue that services are an increasingly important part of GDP growth. However, their own writings contradict this positive assessment. Nicholas Lardy at the Peterson Institute writes a blog post entitled “Retail Sales Numbers are Not a Reliable Indicator for Consumption Expenditure” discussing China retail sales and data. What makes this post so unique is that Lardy supposedly believes that consumption is one of the additive components of GDP, believes that consumption data is inaccurate, but also believes that GDP data is accurate. I’m not going to even try and explain that contradictory logic but instead focus on what his data says about services. In his post on retail sales data and services in China, according to Lardy figure 1 and figure 2, services as a percentage of urban household consumption expenditure is virtually unchanged since 2005. Rural household service as a percentage or household consumption has increased from the mid-range estimate only slightly by approximately 1-2% since 2005. That is not the great rebalancing of the Chinese economy perma-pandas are arguing for, that is the balancing of the Chinese economy. Just to recap what Lardy is arguing: consumption data is inaccurate and can’t be believed but GDP should be believed and that services is rebalancing the Chinese economy when his own data shows the opposite. Perma-pandas keep making arguments with a complete lack of data, data that shows the opposite, or official headline data with underlying component data that shows the opposite.
4.The China Beige Book report on the Chinese economy is getting some good play but the headline being used is “pessimism is divorced from the facts”. The actual report which I have read is distinctly more nuanced than that. For instance, they write that “those touting China’s sudden fragility are either exaggerating current problems or have entirely missed the slowdown of the past several years.” They go on to note that while growth is slowing “no collapse is nigh.” They note that revenue gains in the service sector has been modest. I would say in general this is a reasonable assessment of the Chinese economy, as most of the data I have been covering indicates very low levels of growth and that there is no collapse. However, even the Beige Book analysis does not indicate a rebalancing. A rebalancing necessitates that service and consumption outpace other sectors of the economy. Right now all evidence, excluding topline official data, indicates that the consumption and services are growing at best slow to moderately and definitely not enough to shift the structure of the Chinese economy. Even the Beige Book is not arguing for a rosy economy picture.