Can China’s Economic Data Be Trusted?
Investors fleeing China at record pace
Uncertainty over the accuracy of China’s economic data is making investors nervous yet again, mounting pressure on officials to be transparent in the wake of the recent collapse in Chinese stock markets.
Capital outflow from China has doubled from last year as investors’ flight to quality continues. The People’s Bank of China’s foreign exchange reserves have dropped by $315 billion over the past twelve months, as the central bank attempts to support the Yuan amidst the rush of outbound funds.
The declining foreign exchange reserves are expected to dwindle further by $40 billion per month through until the end of the year.
In July, while China reported a robust 7% growth rate, its credibility took a hit and questions surrounding the validity of this figure rose again. In the ensuing weeks, manufacturing activity data hit three year lows and the doubts began to escalate.
This time markets were unable to shake the concerns off. What followed was a catastrophic collapse in the markets that shattered investor confidence and had the Chinese government scurrying into damage control mode.
With the Shanghai Composite down more than 30% in three months since July and investors rushing to the exit doors, the Chinese authorities took drastic action. The Chinese Security Regulation Commission imposed a six month ban on share sale by investors who had a stake of 5% or more in a company. Soon after China began to sell its holdings of US Treasuries to raise US Dollars they needed to help support the currency.
The uncertainty and potential vulnerability around the state of the Chinese financial system is affecting monetary policy in The United States.
Fearing contagion, the US Federal Reserve left interest rates unchanged last week, despite many calling for a rate hike. The Fed cited concerns in the Chinese economy as a dominant factor in their decision to stick with the status quo. On CNBC Bill Gross, manager of the $1.4 billion Janus Bond, Fund and founder of PIMCO suggested the Fed had altered the pecking order when assessing monetary policy. He said ‘they’ve gone global’ referring to the Fed’s focus on China and Emerging Markets. Traditionally global concerns would fall behind domestic inflation, domestic growth and financial conditions when the fed assessed monetary policy.
The authenticity of Chinese data had also come into question earlier during the 1990s Asian crisis, where it reported strong growth even as the neighboring Asian nations plunged into recession.
But this time things are different, global interlinkages that have grown since the 1990s are already being tested as Emerging Markets suffer. The pace at which China has fallen out of favor with foreign investors, as the doubts continue should serve as a sign to officials that it is time to open their doors.