China’s Growth – Miracle Or Mirage by 720 Global

“Pay no attention to the man behind the curtain!” – L. Frank Baum (The Wizard of Oz)

Once again, the release of China’s GDP on October 19th brought few surprises. Year over year growth was reported at 6.9%, slightly higher than an expected increase of 6.8%. Recent volatility in China’s stock markets and growing concerns globally over China’s ability to maintain strong economic growth focuses a spotlight on their economic environment and makes GDP data of vital interest to investors world-wide. China represents approximately 18% of global GDP, but more importantly given their relatively high growth rate versus other major economies, they have an outsized effect on global growth at the margin.

The accuracy of Chinese data is frequently questioned, and a look at their recent GDP data should raise further concern about the reliability of their data. It is highly likely that data released by China’s central planners is meant to quell economic concerns and tell a story of solid economic growth instead of painting an accurate picture of the state of their economy.

Forecasting and calculating GDP is extremely complex due to the massive amounts of data required to quantify economic activity. Forecasting U.S. GDP has proven extremely difficult for economists, even though an immense amount of reliable and timely data exists. China reports much less data than the U.S. and the reliability of the data is certainly questionable. This lack of dependable inputs makes forecasting China’s economic growth inherently much harder. In spite of such hurdles, those forecasting China’s GDP have developed an uncanny ability to hit the nail on the head. The chart below shows the accuracy of consensus Chinese and American GDP forecasts versus actual GDP. Note that in the last 6 quarters, the consensus forecast for China’s growth was perfect half the time. The other half was off by a mere tenth of one percent per quarter. Conversely, forecasts of U.S. growth have missed by a wide margin more often than not.

Difference between Consensus Forecasts vs. Actual GDP

China

China’s economy is an important factor in global economic growth forecasts and thus the evaluation of assets of all types. Simply relying on governmental reporting and forecasts based on economic story lines instead of facts is fraught with risk. Inflation, fixed asset investment, exports, real estate prices and reams of other economic data point to a weaker growth rate in China than is being reported.
We are not making a forecast, but simply raising awareness that what you see may not be what is occurring. Relying on forecasts and ultimately data which are very likely based on a story being told by the government is a mistake. The implications of such a mistake can be very costly to investors when truth and reality begin to emerge and erode manufactured perceptions.

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