Sent: 28-05-2014 09:48:03
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Distinguishing between news and information - Interpreting Chinese Economic Statistics
Investment analysts are continually fighting statistical overload. Chinese economic data illustrate how analysts can be confronted repeatedly with differently branded images of the same information as if, each time, it is something new.
The first instinct of analysts wanting to know the extent to which Chinese output is growing is to turn to quarterly GDP estimates as they do in analysing the economies of other countries.
Chinese GDP estimates are unusually timely generally being released less than four weeks after the end of the period for which they are prepared. The March quarter GDP estimate was released on 16 April.
In contrast, the Australian quarterly GDP estimate for a much smaller and less complex economy is published a full three months after the end of the period. In the USA, quarterly GDP estimates come in three waves over the succeeding quarter. The advance estimate for the December quarter, for example, came on 30 January, the second estimate a month later and the third estimate with the fullest data coverage landed at the end of March.
The apparent speed alone of the official Chinese statistical agency invites some doubts about the quality of its product leaving analysts open to cultivating alternative sources.
The Chinese numbers are also far less detailed than those produced by any advanced economy statistical agency making it difficult to cross check series to independently identify discrepancies which might need ironing out with fuller data at a later date.
Government sourced statistics are also considered prone to misreporting at the local level by officials with output and growth targets to meet.
To counter the perceived shortcomings in the GDP data, a heavier reliance is placed on the Chinese government's monthly survey of manufacturing purchasing managers than might otherwise be the case.
Based on the long running U.S. Institute for Supply Managers index, the Chinese survey of 3,000 enterprises offers a glimpse of current views within industry and expectations about future rates of activity. This indicator is typically published on the first day of each month after the survey is completed.
Another index, the HSBC purchasing managers index, has also gained prominence. It is designed to gain name recognition for the sponsoring financial institution by pre-empting the comparable government version.
The HSBC index needs to come out before the official index for its commercial intent to be fully realised. The emphasis on speed of production means the HSBC index is less comprehensive than the government version. It covers only 430 companies.
Despite the much smaller sample, the HSBC index can only beat the official version by a day or two at most. To speed things up and create some market buzz, HSBC releases a flash estimate a week or so before the final version of its index is available. This month's HSBC guess about its later guess about the government's subsequent guess about the state of the economy came out on 22 May.
Ahead of this, Bloomberg surveys economists about their expectations of what the preliminary HSBC number is going to be. This way, the news organisation can get into the act by creating its own headline about Chinese growth prospects well before any statistics are available.
The Bloomberg report allows traders to react to their own reactions about the initial HSBC guess about its later guess about the government's own guess about the state of the economy.
This process of statistical leapfrog offers investors five pieces of news but only one piece of information leaving them at risk of jumping at shadows unnecessarily. Traders earning a living by reacting to news might encourage the extra opportunities but investors should be careful to distinguish news from information.
From an analytical standpoint, as a general rule, investors need to choose the indicator which offers the best insight into the investment variable being appraised and keep focussed on the one measure to avoid being pulled in contradictory directions.
Over the last two months, for example, the official Chinese purchasing managers index has been showing a manufacturing sector hovering on the edge between growth and contraction. The HSBC measure has been indicating that a contraction has already begun.
There is no independently verifiable information about which one is right. Picking one over the other would imply an understanding about what was happening when such an understanding does not actually exist.
Succumbing to temptation by changing measures midstream implies that the user of the statistics actually knows what is happening, in this case to Chinese economic output, rather than using the statistics to gain that understanding.
Ducking and diving between series will rarely offer an investor the guidance he or she needs for effective decision making. It is more likely to result in confusion.
From a market perspective, momentum is usually more important than levels, in any case. The wisest way forward is to pick one measure based on fundamental analysis and a historical track record and concentrate on what it says about directional changes until it is proven unreliable.
You can view a chart of the Chinese official purchasing managers index and movements in the S&P/ASX 300 resources share price index in my daily dairy notes for 1 April available here: http://www.eimcapital.com.au/PortfolioDirect/daily_views0414.htm.
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