China Slowdown Coverup Fools Analysts

Many veteran China watchers appear to have been fooled by faked statistics coming from Chinese government sources. It appears that the economic slowdown in China may be deeper and more extensive than previously suspected -- rivaling the slowdown of late 2008 - early 2009.

Record-setting mountains of excess coal have accumulated at the country’s biggest storage areas because power plants are burning less coal in the face of tumbling electricity demand. But local and provincial government officials have forced plant managers not to report to Beijing the full extent of the slowdown, power sector executives said.

Electricity production and consumption have been considered a telltale sign of a wide variety of economic activity. They are widely viewed by foreign investors and even some Chinese officials as the gold standard for measuring what is really happening in the country’s economy, because the gathering and reporting of data in China is not considered as reliable as it is in many countries.

Indeed, officials in some cities and provinces are also overstating economic output, corporate revenue, corporate profits and tax receipts, the corporate executives and economists said. The officials do so by urging businesses to keep separate sets of books, showing improving business results and tax payments that do not exist.

The executives and economists roughly estimated that the effect of the inaccurate statistics was to falsely inflate a variety of economic indicators by 1 or 2 percentage points. That may be enough to make very bad economic news look merely bad. The executives and economists requested anonymity for fear of jeopardizing their relationship with the Chinese authorities, on whom they depend for data and business deals. _NYT

As mountains of coal, copper, and other commodities continue to pile up at Chinese depots, China analysts are beginning to wonder if they can trust any numbers whatsoever that hove their origin within the Chinese government or state owned entities.

Serious economic decline linked to a banking crisis has affected several countries in Europe, and lower oil prices are beginning to take their toll on Russia. If China is forced to reduce its massive commodities stockpiling and the massive infrastructure overbuild, exporting nations such as Brazil and Australia may begin to feel the pain.

Al Fin economic analysts have been warning readers of this possibility for well over a year now, but as of yet global commodities prices have not yet dropped back to 2007 levels.

The Chinese government has very good reasons to not show any public sign of economic weakness at this time. But if it is forced to back off from its ambitious building stimulus scheme, the global repercussions in commodities markets may make 2008 / 2009 look like boom time.