Shadow Government

Why China's economic opacity is a serious problem

An interesting thing has happened on the way from strategic competitor to regional ally (or whatever it is that President Obama labels China these days). During the economic malaise of the world's largest economy, and during Japan's lingering inability to escape the grips of recession, the Chinese economy has grown to become the world's second largest, behind only the U.S. (Japan's former position).

Of course this is not necessarily a bad thing. Economic growth hopefully will bring more freedom to China's people. At a minimum it'll allow more of its citizens to buy widgets that help them get around the Great Firewall.

The part that is troubling is that China's economy is not becoming more transparent. All of their statistics come from a national statistics bureau ultimately beholden to political leadership. The numbers are spartan, and even if the numbers are accurate they are far too broad to dissect an economy as complex as China's. The traditional data sources for the Chinese economy have remained the same and are no longer sufficient for the world's second largest economy, not for the financial world. The shortcomings of the NBS is a topic covered in depth here), here or here. If you're not interested in reading more there, just consider that China's quarterly stats, for an economy of 1.3 billion people, is tabulated in just two weeks. By comparison, the same tabulation takes the U.S. over a month. Amazing given China's size and the very restricted resources of the statistical bureau. Likewise, the headline numbers often seem to be edited to match other economic indicators -- and yet, the quarter-on-quarter and year-on-year numbers often don't make a lot of sense when compared. There is also no attempt to report stats like urban and rural employment. The Statistical Bureau makes revisions but they are only upward revisions and always create a discrepancy between revised and unrevised reports. Most obviously, there's a built in incentive for provincial officials to report higher numbers. You see the result of this in the creative math used in tabulating GDP for China's 32 administrative regions. Every single region reported forecasts of 8 percent of GDP or higher last year. Yet, the nationwide forecast was 8 percent.

But before Tom Friedman or Ray Lahood can say that it's just because China is better managed or uses better math, let me posit the obvious: China is publishing numbers to fit a set storyline and not vice versa. (Full disclosure: I am co-founder of a company that publishes The China Beige Book, a private quarterly survey that uses exclusively independent data to produce an accurate, real-time snapshot of the Chinese economy -- the views here are my own and do represent those of CBB, LLC). In a healthy economy, the government will publish data, and hoards of private companies will do their own research to either support or argue with the official results. That's not happening in China.

It's a real problem because of China's importance to the world market. Bad data begets bad policy. The White House is making decisions based on a limited view of what China's policy freedom of action may be because they're reacting to inadequate economic data -- and we know U.S. policymakers don't have better data. All over the world decisions are made on the perceptions -- not facts -- about what is going on.

How many G20 meetings have there been since the financial crisis during which this issue -- better and more transparent data -- was raised (Hint: Zero)? How about any special point raised by the IMF or World Bank -- all institutions the West controls? This is the world's second largest economy and every leader on earth may be flying blind, and doesn't seem to care. This has ripple effects throughout the financial world. National-level policy makers, hedge and pension fund managers, and even people controlling their own 401k all need better data. Yet, we seem all to be ok flying blind.

With the U.S. locked in horrific growth, no demand from Japan, and the eurozone's fiscal profligacy having made it a ticking time bomb, China's economic growth -- and how it deals (or does not deal) with the serious imbalances in its economy -- is becoming more important to the world economy, not less. The world of finance (including the Treasury Department and the Fed) are hanging their hat on world GDP growth impacted greatly by China's economy. Those decisions will impact your pocketbook directly. Like it or not China is deeply integrated into the world economy and into the U.S. economy in particular.

The fact is that we can't be sure what's going on there (is the bottom falling out of the real estate market, are unregulated non-banks easing credit, are they stockpiling valuable commodities?) We think we know the answer to some of these questions but we're not sure. Just this morning, the Wall Street Journal's Tom Orlick, one of the best commentators on this subject, penned a piece guessing about China's current inflation rate.

It's a very serious issue because the reality -- not the perception -- of China's economic health will impact the world economy. Decisions regarding U.S. government policies, Fed policy, world stock markets plays, and even your 401k are all made based on those perceptions. But the outcome will be based on reality. Tiny Greece is a good lesson -- it's a different situation but the same concept. Europe was cruising along blissfully on the perception that Greece was doing fine. But when the Greek government decided to come clean about the reality of debt off the books the euro crisis began in earnest. I'm not suggesting China necessarily has something to come clean about (though China's non-performing loans make for interesting reading) or that we are at some inflection point. But this is a dangerous time to be leaning on such dubious statistics.


Shadow Government

Give Peña Nieto -- and the PRI -- a chance

I'd like to follow up on my colleague Jose Cardenas' excellent post last week on the presidential election in Mexico. The PRI's Enrique Peña Nieto has won, but with only a little more than 38 percent of the vote. He will have to make deals with the opposition in the national legislature to get the much needed reforms he promised; exert his authority over the PRI at all levels, including the governors; handle any lingering student protests deftly; and win over critics in the United States and abroad who have a phobia where the PRI is concerned. All these burdens are legitimately laid on him, but the latter one is arguably unfair and unhelpful if taken too far.

As it is said, "the sins of the fathers are visited on the children to the third and fourth generations." Nevertheless, Peña Nieto should not be held accountable for the PRI's misdeeds and political culture over 71 years of rule for two very good reasons. First, he has already demonstrated in his governorship of Mexico state that though he might be a scion of the quintessential old guard, he has governed differently in many ways. For example, he was a reformer in his state as he tackled tax cheating at every level, including in his own cabinet. And Peña Nieto has experience working with an opposition legislature as governor.

Second, he has positioned himself among a line of PRI reformers. The PRI was transforming itself, albeit slowly, even from the time of Miguel de la Madrid Hurtado in the 1980s. In other words, let's give credit where it is due and see the previous three PRI presidents, even with their warts, as reformers who had already begun to free the PRI from the grip of the dinosaurs. From the 1980s on, the PRI was pro-free trade, seeking foreign investment and knocking down barriers to it. By the time of Ernesto Zedillo, the PRI was on the path to reforming and improving Mexico's democratic institutions and culture. The PRI has been choosing candidates by primaries for years now and has been learning what a legitimate opposition actually is by having to live as one. Maybe we can say that with Peña Nieto enough generations have lapsed for the sins to be expunged. It is time to start fresh with the PRI and give him a guarded benefit of the doubt.

He has started his national presence rather well, despite the accusations of electoral fraud that will be evaluated by the elections tribunal. Peña Nieto led in the polls for most of the campaign and the charges tossed about now are so far mostly about the perennial vote-buying and media bias. In the old days, the charges would have been electronic manipulation of the vote and outright ballot-box stuffing; who can forget the "computer crash" that led to the victory of Carlos Salinas in 1988 that no one doubts was fraudulent. We'll see if any of the charges hold up or if there are more serious ones, but for the most part, it appears that not even the PRD loser, Lopez Obrador, is willing to go the barricades again as he did for months his last time out.

Throughout his campaign and even now as the president-elect, Peña Nieto has said a lot of things that should encourage the United States and win over at least those segments of Mexico that understand that there is no chance of growth and prosperity without a strong commercial Mexico that works well with the United States, regional partners, and the emerging Pacific Alliance. Most important of all, Peña Nieto is determined to reform the labor laws and foreign ownership regulations that have stymied Mexico's growth. The PRI blocked these reforms while in opposition, most likely out of a stubborn refusal to allow the PAN presidents to win their biggest agenda items. But now the PRI is led by a president who campaigned to do these things because he knows, unlike the dinosaurs, that there is no other option if Mexico is to prosper. The PRI and the PAN will have a chance to make an alliance for reform. Let's hope the PAN is not stricken with foolish pride. It is certain that the PRD leftists will not try to move Mexico into the modern world of global competition and cooperation among investors and producers.

So a PRI victory can certainly be a boon for the United States. It already is in some ways regarding the security issues surrounding the drug war. Peña Nieto's tapping of the former Colombian National Police Chief, Oscar Naranjo, as his advisor speaks volumes for his commitment and determination to continue the war against those who make war on society. While he might change some tactics, the public and the new president appear as committed as ever to curtailing the violence with all the means the state can bring to the task. Will he focus more on stopping the violence and less on arresting kingpins? Perhaps, but that is not the same thing as saying he will return to the old PRI modus vivendi of making deals with outlaws. He'd lose Naranjo quickly if that is his plan and he has no interest in making both his citizens and the United States nervous by doing so.

And speaking of interests, in all the problems he'll face, the new president has zero interest in returning to his party's corporatist, statist, and sometimes violent roots. He has demonstrated with bold words and deeds that he is a modern politician of a chastened party that, having begun to reform itself and having suffered 12 years in the wilderness, knows what the future must look like. He might have been raised by the dinosaurs in his home state (which was for decades ground zero for the dinosaurs), but he talks and acts like a different breed. He appears to be a leader who can appreciate the technocrats who began the changes in his party (and he surrounds himself with U.S.-educated advisors), but so far he seems to be a politician who can get things done, who knows how to lead Mexico for what it is while looking ahead to what it can be.

Only Nixon could go to China, another saying goes. And perhaps only the PRI can take Mexico fully into a future of free trade, free labor, and freely flowing -- and abundant -- foreign investment in the moribund Mexican energy sector. The United States should not squander the opportunity to give this new leader and this hopefully newly reborn party a chance to prove his critics wrong.

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