China: Behind the Numbers

Leland Miller, an expert on the Chinese financial system and president of data analytics firm, China Beige Book International, visited Global Finance to discuss China’s official economic statistics and the financial implications of the upcoming political transition.

Global Finance: What economic indicators does your firm focus on in China?

Leland Miller: Growth alone is not a good indicator, due to China’s borrowing and spending. Additionally, GDP information can be easily manipulated and numbers are not transparent. We take into account additional factors, such as labor and credit markets. Non-performing loans and cost of capital in various geographies are also better indicators.

GF: How significant is the difference between China’s official economic statistics and your numbers?

Miller: There is a significant gap between China’s positive outlook for GDP and our estimated numbers for corporate revenue growth and cash flow. Chinese GDP measures aggregate growth and not productive growth, which is the more meaningful indicator. The reality is that many financial actors do believe the Chinese official numbers, and markets move accordingly. For instance, in the summer of 2015, Chinese stock markets collapsed and the manufacturing index showed negative results, but our analysis showed only a mild slowdown and growth in some other parts of the economy. Eventually, the Chinese economy did not collapse in the way that many people expected.

GF: How do you assess the state of the Chinese economy and its debt?

Miller: We see China as a two-tier economy. One tier is manufacturing—the old economy; and the other is services—the new economy. Even if manufacturing is down in China, the economy can be balanced if services are doing well. There is an improvement in China’s high levels of debt and its labor market. Yet, our main indicator for debt is cash flow, and we’ve started to see serious constraints. Chinese capital outflows will decline in 2017 and Chinese investments in the US market and Chinese-US M&A will shrink, as both governments try to slow the pace. The European economies may benefit and increase their investment market share globally. The Chinese overpaying for acquisitions of foreign trophy assets is over.

GF: How will political developments in China impact fiscal and monetary policies?

Miller: Many analysts have assumed for more than a year that the Chinese government would devalue the Chinese currency significantly. Yet, we think that the Chinese government is not interested in devaluation and a currency war. Such a move would hurt their economy, especially before the 19th National Congress of the Communist Party in the autumn of this year. From our point of view, a stronger US dollar and a weaker yuan would be driven more by markets’ perceptions than Chinese policy.

On the other hand, the recent appreciation of the yuan against a basket of currencies created by the Chinese government, is mainly artificial. As Chinese labor market indicators are positive, there is no need for another fiscal stimulus; and they will wait till after the National Congress for any decision on this powerful tool. Future crises and slow economic stagnation may happen due to market perception and the Chinese government’s limited execution of its necessary structural reforms and diversification.