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Something is rotten in the state of Chinese economic data

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Is official economic data from China reliable? That's a very 2013 kind of question. It was an issue that lurked in the background during the pre-financial crisis years, but at the time, investors were content to count their profits from China-related resource investments and pray for the best. However, the skepticism has intensified over the past year. After parsing the numbers, Toshiya Tsugami, a former 2002 Senior Fellow at Japan's Research Institute of Economy, Trade and Industry, stated outright last week that recent data has reached fictional proportions.

The crux of Mr. Tsugami's argument is that Chinese government reports of total infrastructure investment are not supported by bank loan data. He notes the official estimate of 110 trillion yuan ($18-trillion) in infrastructure spending for the four years ending in 2012 is not believable when total bank loans account for only 67 trillion yuan, even in light of the recent boom in corporate bond issuance:

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[Facts such as these] suggest that the actual amount of fixed-asset investments made last year was far smaller than the figure released by the government…. Even if it is true that the Chinese economy improved slightly in autumn last year, it is hard to believe the government's claim that the economy grew by 7.8 per cent in 2012.

Economists consider Chinese rail freight traffic and electricity generation as the two data points most immune from government manipulation. So, charting these against official gross domestic product has been the main method of assessing the veracity of official reports.

After completing this analysis in this chart, there are only two conclusions we can draw – either Mr. Tsugami is wrong, or the Chinese government has learned to fudge electrical power and rail freight statistics.

At this point the true state of the Chinese economy is almost like politics or the true value of gold, a matter of personal opinion with ample fodder for both bulls and bears. Admittedly, that's not the most helpful observation, particularly with so much of the domestic stock market dependent on China to determine commodity prices. But we're pretty much at the point where making bold predictions is irresponsible.

Scott Barlow is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow Scott on Twitter at @SBarlow_ROB.

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About the Author
Market Strategist

Scott Barlow is The Globe's in-house market strategist. He is a 20-year veteran of Canadian investment banks, including Merrill Lynch Canada, CIBC Wood Gundy and Macquarie Private Wealth (MPW). He was a highly ranked mutual fund analyst for 10 years and then, most recently, the head of a financial adviser support team at MPW. More

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