Sat, Oct 29, 2016 page8

• The Liberty Times Editorial: Treat Chinese data with skepticism

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  Official figures announced by China on Wednesday last week said that the Chinese economy grew by 6.7 percent in the third quarter compared with the same period last year, the same rate as the previous two quarters and falling within the official target range of 6.5 percent to 7 percent.

  While this coheres with the forecasts of some, there are many who question the figures. A report in the New York Times cast doubts, while the Wall Street Journal was more specific, saying that this is the first time since China started announcing its quarterly economic growth rate in 1992 that the rate has been the same for three consecutive quarters and the reliability of China’s economic figures needs to be questioned. The Japanese Nikkei Asian Review questioned the figures in an editorial called “Stable growth in China’s economy cannot conceal the bubble.”

  It is not news that China’s official figures might not be entirely reliable. After all, Chinese Premier Li Keqiang (李克強), an economist, has questioned them in the past.

  There is a very good reason for this and one that is very Chinese. Official figures are statistical sophistry used to serve political ends under a one-party authoritarian system; under the party-state system, economics is subservient to politics and statistics are subjugated to political goals.

  Questionable statistics spelled economic disaster in the late 1950s during then-Chinese leader Mao Zedong’s (毛澤東) “Great Leap Forward,” resulting in the starvation of tens of millions of people. By the time the Chinese economy was opened up by late Chinese leader Deng Xiaoping (鄧小平), questionable figures were once more employed, massaged to within an inch of their life, in order to provide cheap labor for the world, allowing China to ride the globalization trend and transform itself into the world’s workshop, ushering in China’s economic rise.

  After China’s growth rate peaked in the first decade of the 21st century and to achieve official growth targets, the government continued increasing investment and extending credit to stimulate the economy, producing a series of economic bubbles. These cropped up in so many sectors, from speculation on the property, equities, other financial products and gold, to the bitcoin market, following the 4 trillion yuan (US$589 billion) stimulus package necessitated by the financial crash set in motion by the Lehman Brothers collapse.

  Chinese local governments, state-owned enterprises, shadow banking and online financial institutions all invested, leading to the accumulation of mountains of debt in both the public and private sectors. Recently, the Bank for International Settlements and the IMF have sounded the alarm on the severity of China’s debt problem and how China is greatly increasing the risk of a financial catastrophe, with the serious negative impact this is having on China and the global economy.

  From the latest figures, it does seem that the growth rate has stabilized at 6.7 percent. However, with a slowdown in exports and high levels of reliance on state investment, the property market and debt servicing, and especially when growth of debt is higher than economic output, the economy is becoming increasingly unbalanced.

  There are all sorts of obstacles to transforming the economy from relying on investment to a more services and consumer-driven economy. Given this, and to maintain the official growth targets, China might have to postpone, or shelve entirely, its supply-side reforms suppressing production output. This means that so-called zombie enterprises would continue to proliferate and more economic bubbles would be allowed to form.

  The IMF has outlined two problematic outcomes: If China goes ahead with the reforms, economic growth is sure to shrink in the next year or so, while if it does not introduce the reforms, the economy might continue to grow at the official target rate, but it would gradually fall to only 3 percent by 2020.

  Precisely because China is approaching one of these two unfortunate outcomes, the time has come for Taiwan to think very carefully about whether it should lower the degree to which it relies on the Chinese market. Taiwan is already tied up in China’s economic bubble and it has been quite damaging.

  Prosecutors are investigating the XPEC Entertainment Inc case, a money game some have alleged is directed by Chinese Internet tycoon Wang Ji (王佶), XPEC chairman Aaron Hsu (許金龍) and former stockbroker Yang Jui-jen (楊瑞仁), that has hurt many investors. The responsibility of financial institutions in the target redemption forwards case perhaps still needs clarification, but Taiwanese were clearly mislead into thinking that the interest rate of the Chinese yuan would appreciate, which would allow them to make good profits.

  These events keep on occurring. On Oct. 1, the Chinese yuan was included in the basket of currencies that make up the IMF’s Special Drawing Rights. China is allowing its currency to depreciate, which has come as a surprise to currency markets and many people who had a bullish outlook on the yuan suffered further losses.

  Taiwan seems to have been the main victim of China’s economic rise, as industries have been undermined and the economy has slowed, while Taiwan has had to deal with constant political interference and national security concerns. When trade exchanges with China started developing, some of the problems might have included unclear vision and misjudgements to the effect that the economies of Taiwan and China could remain separated, while industries worked together with both sides winning out.

  However, as aquaculture businesses said last week, even the export of grouper to China leads to imbalances in demand and supply, and since aquaculture technologies are moving out of Taiwan, the industry is suffering. This is the result of trusting the pretty, but empty information that China and its representatives in the Taiwanese media keep spreading.

  Since President Tsai Ing-wen (蔡英文) took office, the government has been pushing for industrial reform and economic revival, and the “new southbound policy” and other policies aim to lower Taiwan’s economic dependence on China. However, this is a difficult job and eight years of former president Ma Ying-jeou’s (馬英九) pro-China policies is making it even more difficult.

  The “new southbound policy” and the diversification of the economy requires a lot of hard work and will not be achieved overnight. Doing all this requires a healthy skepticism of official Chinese data and a refusal to blindly trust it. That applies to politicians as well as investors.

  Translated by Paul Cooper and Perry Svensson
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