Chinese operas have been keeping audiences enthralled for hundreds of years with mythical characters, enchanting stories and elaborate masks that add drama and mystery. While this fantastical treatment is appreciated in the theatre, it isn’t in global markets. Investors don’t like mystery – think of how uncertainty has spooked markets in recent years.
Global investors are rarely privy to every detail about the economy; that’s why it’s necessary to rely on multiple data and research to make decisions and be cautious of extreme views that unnecessarily arouse suspicion, skepticism, and criticism. These opinions may grab headlines, but rarely do they help investors’ portfolios.
A recent article in The New York Times raised doubts about the quality in China’s macroeconomic reporting. The Times pointed to evidence from “prominent corporate executives inChina and Western economists” who say that “local and provincial officials are falsifying economic statistics to disguise the true depth of the troubles.” The author alarmed many of our readers, so we immediately contacted numerous analysts – many of whom have front row seats to Chinese economic data – to get their reaction.
Some analysts preempted our request by independently sending out a rebuttal, including CLSA’s China Macro Strategist Andy Rothman, in his Sinology report titled, “Lies, Damned Lies…” Since 2006, global investors have come to rely on this company’s coverage of Chinabecause of its ability to “independently monitor mainland economic activity.” See Andy’s insightful views on China from a recent webcast.
Don Straszheim from ISI also emailed his view on the veracity of Chinese data. (We note that Don was correct on a recent call on China. When he visited our office at the beginning of June, he correctly predicted the interest rate cut, whichChina made two days after his visit.)
We’re all influenced by emotions, of course, and when used to our advantage, can help guide how we invest. However, we need to be aware of how outside biases can influence our judgment. In Thinking, Fast and Slow, Daniel Kahneman writes about a mechanism through which biases flow called an “availability cascade,” a term coined by Cass Sunstein and Timur Kuran. Kahneman says the availability cascade is a “self-sustaining chain of events, which may start from media reports of a relatively minor event and lead up to public panic and large-scale government action.” The vicious cycle goes like this: As people begin to worry, they seek more information and are attracted to similar news reports, which encourages additional coverage. The “availability entrepreneurs” are the ones who deliberately want to keep the negative news flowing.
This may not have been the intention of the Times – and other China bears – but its business is selling newspapers.
Kahneman focuses his discussion on how policies should take into consideration a combination of “experts’ knowledge with the public’s emotions and intuitions.” This thinking also relates to investment decisions, which is why our SWOT model is designed to help us review a variety of sources, along with emotion and intuition, and categorize the results in terms of strengths, weaknesses, opportunities and threats.
It’s not breaking news that China’s data is less-than-perfect. Analysts have been saying this for years. CEBM says simply that the Times article is “a true but not new story,” while ISI believes “the shortcomings ofChina data is a topic everyChina macro journalist writes on every year or so – with small variations and supporting anecdotes.”
Part of the reason the topic ofChina’s “disguise” keeps coming up stems from the fact that the country has not had a very long history of “professional independence from the political machinery inBeijing,” says ISI. Unlike developed countries, ISI believesChina’s data system continues to be opaque and primitive. The countries’ inadequacies are relatively common among emerging markets, as numerous analysts have pointed out.
This fact does not releaseChinafrom its responsibility to make sure that investors have accurate information. Rather, because the country has become an economic powerhouse, it is under greater scrutiny, which means it needs to improve its checks and balances. CLSA says the central government has been aware of how local officials inflate their data and “has been taking steps to mitigate the problem.” For example, more than 700,000 companies now report their data directly to the National Bureau of Statistics, rather than the local governments. NBS data is typically used to forecast consumption of key commodities, says CLSA.
The Times discussed how electricity production and consumption is “a telltale sign of a wide variety of economic activity” and is a “gold standard” for finding out how the economy is doing. A few months ago, US Global’s analyst, Xian Liang talked about how important electricity consumption was as a measure of activity – some commercial banks that lend to small companies would physically check the meters themselves.