Chinas Growth - Miracle or Mirage

Pay no attention to the man behind the curtain! L. Frank Baum (The Wizard of Oz)

Once again, the release of Chinas GDP on October 19th brought few surprises. Year over year
growth was reported at 6.9%, slightly higher than an expected increase of 6.8%. Recent volatility
in Chinas stock markets and growing concerns globally over Chinas ability to maintain strong
economic growth focuses a spotlight on their economic environment and makes GDP data of vital
interest to investors world-wide. China represents approximately 18% of global GDP, but more
importantly given their relatively high growth rate versus other major economies, they have an
outsized effect on global growth at the margin.
The accuracy of Chinese data is frequently questioned, and a look at their recent GDP data should
raise further concern about the reliability of their data. It is highly likely that data released by
Chinas central planners is meant to quell economic concerns and tell a story of solid economic
growth instead of painting an accurate picture of the state of their economy.
Forecasting and calculating GDP is extremely complex due to the massive amounts of data
required to quantify economic activity. Forecasting U.S. GDP has proven extremely difficult for
economists, even though an immense amount of reliable and timely data exists. China reports
much less data than the U.S. and the reliability of the data is certainly questionable. This lack of
dependable inputs makes forecasting Chinas economic growth inherently much harder. In spite
of such hurdles, those forecasting Chinas GDP have developed an uncanny ability to hit the nail
on the head. The chart below shows the accuracy of consensus Chinese and American GDP
forecasts versus actual GDP. Note that in the last 6 quarters, the consensus forecast for Chinas
growth was perfect half the time. The other half was off by a mere tenth of one percent per
quarter. Conversely, forecasts of U.S. growth have missed by a wide margin more often than not.

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Difference between Consensus Forecasts vs. Actual GDP

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Q1 2014

Q2 2014

Q3 2014
U.S.

Q4 2014
China

Q1 2015

Q2 2015

Data Courtesy: Bloomberg

Chinas economy is an important factor in global economic growth forecasts and thus the
evaluation of assets of all types. Simply relying on governmental reporting and forecasts based
on economic story lines instead of facts is fraught with risk. Inflation, fixed asset investment,
exports, real estate prices and reams of other economic data point to a weaker growth rate in
China than is being reported.
We are not making a forecast, but simply raising awareness that what you see may not be what
is occurring. Relying on forecasts and ultimately data which are very likely based on a story
being told by the government is a mistake. The implications of such a mistake can be very costly
to investors when truth and reality begin to emerge and erode manufactured perceptions.

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