China’s statistical conundrums – the example of the PMIs

September 12th, 2018

Surprisingly, one still can find people who believe that statistical quality in China has been improving in recent years. I myself cannot find evidence for such a conclusion, neither can our LNU China Panel (https://blogg.lnu.se/china-research/files/2018/05/ChinaPanelSurvey-May-2018.pdf ; at least there is no marketing or concrete information on such a desirable change coming from Chinese authorities. Still, there is a lot to wonder about.

One discrepancy that still makes me puzzled concerns statistics on GDP, industrial production and the Purchasing Manager Indices (PMIs). It may be added that I feel quite sure to understand the technical mechanisms of PMIs since I myself prepared and introduced the Swedish PMI almost 25 years ago together with my colleague Åke Gustafsson from Swedbank. Sometimes, statistical correlation between these micro and macro indicators is questioned ; and I myself – following my own historical experience – cannot either see sufficient consistency right now between the Chinese PMIs and Chinese industrial production or GDP – possibly or probably as a result of insufficient statistical quality rather than non-existing correlation.

Two PMIs in China

Let’s look at some numbers. There are actually two PMIs in China. One is produced by the National Bureau of Statistics (NBS) and the China Federation of Logistics and Purchases (CFLP) with focus on 3000-4000 larger companies including SoEs, the other one by Caixin/Markit with 430 private, mainly medium-sized and smaller companies. According to statistics for August 2018, the NBS/CFLP PMI for manufacturing rose slightly from 51.2 to 51.3 compared to the month before, whereas the corresponding Caixin/Markit index fell to 50.6 from 50.8. These numbers – not very far from the “borderline” of 50 between better and weakening growth – have been in these numerical regions for quite some time.

Abroad, the Caixin/Markit PMI tends to receive better recognition than the NBS/CFLP index because of no or only limited governmental influence. However, both indices are interpreted and commented very strictly when it comes to the borderline of 50. Just above 50 is usually regarded as positive and just below 50 as negative. But users of the PMI indices should be aware of the fact that both PMI series are calculated as diffusion indices that do not really reflect the strength of changes in the participating individual companies – and, consequently, only the direction. For this reason, I cannot warn enough for putting too much positive focus on numbers slightly above/below 50 and too encouraging/discouraging oral and written comments on further expansion or contraction. Some months of observation and/or moving averages could be useful.

It should be kept in mind that the Caixin /Markit PMI seems to be a notch closer to industrial reality than the official NBS/CFLP index – and, consequently, better capturing the currently fading export performance of Chinese industry.

Do Chinese PMIs reflect reality?

My view is that China’s PMI numbers during the past quarters have come in on (somewhat) too high levels. Again, a number not too much below 50 does not mean that a recession is going on – instead, for some time, only a declining rate of growth; and a number slightly above 50 does not necessarily point at an further improving industrial activity any time soon.

My strong feeling is that the real state of the Chinese industry seems to be (somewhat?) weaker these days than recent PMI indicators for manufacturing slightly above 50 may indicate. American protectionism hurts.

However, lagging transparency may mean that not all my conclusions necessarily are correct. One should be cautious and humble when interpreting Chinese statistics, also those for the PMIs.

Anyway, the globe’s second largest economy, China, still has a lot of institutional homework to do, improvements of national statistics included.

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
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“Hidden” leading indicators give reason for Chinese growth concern

August 20th, 2018

No doubt, China has not given encouraging growth signals during our European holiday season. I am here not so much focusing on weaker official statistics (GDP, public investment, real growth in retail sales, etc.) but rather on analytically mostly unwatched or neglected signals.

But also hard statistical data were not really favorable – neither the PMI nor production indicators. The escalation of the trade war with the U.S. dampened business confidence, even if Chinese  trade numbers so far did not give particularly negative results (which according to experience and textbooks indeed could take some more time). But the Chinese currency yuan weakened visibly (not so much hidden this time but not very much related to growth concerns by the analysts); so did the two Chinese stock exchanges.

In this analysis, I do not focus very much on hard Chinese statistics. Major parts of Chinese are not (completely) reliable or have their quality shortcomings for other reasons. However, it is worth-while  paying increasing attention all the same when the Chinese themselves publish (slightly) weakening statistical numbers; such an indication came also in July from rising urban unemployment. In this also officially confirmed negative statistical sense growth could indeed be on its way to move in  a more dampened direction.

On the other hand, two developments outside the statistical sphere – which usually are not really observed by Western analysts in a more specific growth perspective – make me usually particularly curious in an economic growth context. They are

– (unexpected) loosening of monetary policy without interest rate cuts, and more than a very temporary weakening of the yuan.

Loosening of monetary conditions (by  decreasing cash requirements for the banks) has indeed taken place more recently despite the debt problem of local governments, firms and private households. It should be observed whether there is more to come in the nearer future.

The real reasons for the weakening of the currency yuan (also called the renminbi,  RMB) in 2018 may be in reality somewhat more opaque. First, there may be fundamental explanations for the drop of the yuan based on the existing  economic imbalances and also at least some negative impact from the trade war with president Trump, which means induced by market forces. Second, there may also have been Chinese political efforts to drive the currency down. My own guess is that reality may include both components. Perhaps the strong fall of the RMB was somewhat overdone but remarkable all the same.

Anyway, there is good reason to believe that Chinese GDP also officially will continue to slow down in the foreseeable future – but slightly and not very visibly apart from probably or possibly (net) exports. GDP growth around 6.5 percent for 2018 seems still be achievable in official real terms.

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board

 

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Turkey’s enormous problems

August 13th, 2018

From my previous professional life as a bank chief economist I remember very well the Turkish banking crisis of 2000/2001, followed by a major economic downturn (GDP 2001: -5.3%). Prior to the banking crisis, macroeconomic imbalances in mainly the budget and the current account had worsened alarmingly and, thus, strongly contributed to fading international confidence in Turkey’s financial – and also political – system. The lira weakened strongly at the time. Foreign investors sold huge amounts of their Turkish T-bills and even stocks. Logically, the currency reserves shrank dramatically. At the end of the day, the IMF provided Turkey with a 10.5 billion financial rescue package. After this, a serious political crisis followed all the same – before an economic recovery could be noted and the weak banking system was reformed into a more stable shape.

Unfortunately, the acute starting position of the current Turkish crisis does not look very different from the one 17 years ago. Major macroeconomic fiscal and trade imbalances exist also today. The Turkish currency has dropped substantially not only in recent days but also by around 35 percent so far in 2018.

Political conditions, however, look partly different this time – with other kinds of political leadership in both Turkey and the U.S., giving the current economic problems in Turkey even stronger political dimensions than in the beginning of this century. But this does not necessarily mean that the current Turkish crisis “automatically” will end in a more benign way, particularly when considering president Trump’s current resistance to potentially needed major international global financial rescue actions.

Worst case scenario

Still, the worst case scenario is only a scenario. But the current situation is critical and can aggravate further. The worst case scenario could include major bank problems in Turkey with contagion to EU banks that have major loan and securities involvement in the Turkish financial system. Such a development could lead to major GDP losses in mainly Turkey but also to a more limited extent in the EU. Read, by the way, more about this relationship in the research of Hyman Minsky!

All this leads to the conclusion that the coming development in Turkey should be given very strong analytical attention. President Trump’s future ideas and action play certainly an important role in this respect. Sometimes, he changes his mind unexpectedly in another direction. But Turkey itself should also under all circumstances work more ambitiously with its ongoing macroeconomic imbalances, particularly since the country is highly indebted abroad – both what concerns private and public debt.

Experience from other countries with similar challenges shows that nervous or speculating financial markets usually are stronger than the defense lines set up by the pressured country with its currency reserves – unless the acute problems are combatted promptly or surprisingly positive news make the whole picture brighter.

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board

 

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