Thursday, 4 February 2016

Who knows what’s happening in China?

February is Chinese New Year, so admittedly it’s a bit strange to be talking about former US Secretary of Defence Robert McNamara. But would he make similar mistakes about China as he did about Vietnam? Given that data and statistics seem integral to both, one can only assume he would have.

Mr McNamara’s central mistake in prosecuting the Vietnam War had little to do with his decisions. By most accounts from his aids he was decisive and aggressive in explaining his choices to President Kennedy. What made his decisions so ineffective was the decision-making process he imported from the business world: a reliance on numbers and data to paint an accurate image of the war.

This approach simply didn’t work. And one suspects something similar is happening in China today. Since the country is so enormous, it’s impossible to know the truth of its economy. Most countries have a similarly fuzzy image, which is why the invention of government data collection is such an integral part of securing and maintaining power inside a nation state.

Thankfully, China is entirely synchronised with this status quo. It dutifully delivers measures of economic activity each month. In fact it believes in the status quo so deeply that it often falsifies this data to impress foreign institutions and investors. Beijing knows westerners think in the framework of numbers and statistics and, like Mr McNamara, it’s how we eventually make decisions.

Looking at some recent data released from China, all indications suggest the country is dipping into a sustained low economic growth period. Most businesspeople, even in New Zealand, are resigned to the fact that China will not “overtake the US” sometime in the next half decade. Or any future decade. That was a poor reading of the Chinese and US economies ten years ago, and it is a poor reading today.

What do these figures show? China’s National Bureau of Statistics (NBS) this week revealed a lower than expected manufacturing output of 49.4 and a non-manufacturing output down to 53.5 in January. A measure over 50 represents growth. These figures could indicate a contraction in available jobs, or a shift, but it’s hard to assemble a robust story about China from only these.

The NBS also shows that industrial profits fell 2.3% in 2015, the first time an annual decline was measured in over a decade. Beijing also says its economy grew only 6.9% in 2015, down from 7.3% in 2014. Some contend the real growth rate is 4.0%, while Chinese businesspeople often suspect in private the rate is nearer 2.2%. Again, too much ambiguity to make sense.

On the other hand, electricity usage was down last year. This could indicate a weakening economy, but it might also be a sign that Beijing’s plan to encourage consumerism in China is actually working. Domestic consumption and services use less power than industry, especially industries that fuel China’s exports.

Adding in data from other countries trading with China clears up some ambiguity. The latest figures from Statistics New Zealand show exports to China increased 9.2% year-on-year in October, and China became New Zealand’s largest export destination in November. Yet in January, South Korean exports to China plunged by 18.5%. China is South Korea’s most important trading partner.

Firstly, the New Zealand figures aren’t indicative of anything. Our main Chinese exports are “middle-class” goods such as protein and wine. China’s middle-class is gigantic and growing, and in theory could purchase everything New Zealand produces even if China’s economy is declining because the total export earnings are so small ($8.41 billion) on a global scale.

Secondly, the South Korean figures don’t help either. Although the country derives about 50% of its GDP from exports, mostly destined for China, there’s more going on. For instance, Seoul hopes to start discussions with the US about an advanced anti-missile shield for the Korean peninsula. Beijing doesn’t like this at all.

Since the highly political discussions about the missile system began a few years ago, China’s pushback has verged on bullying. It knows South Korea is dependent on China and has threatened to tighten or cancel import orders. Beijing believes the shield alters the region’s balance of power, so the economic dip with Seoul shouldn’t discount politics.

Ultimately, Mr McNamara’s lesson to distrust data isn’t vogue in modern times. Data-driven consensus predicts China is in a serious slowdown, affecting everybody. But data is simply data, it requires human minds to transform into knowledge. And there are many narratives, not to mention countless data not collected or data which cannot be collected.

It’s quite clear that China is changing and scaring many sober analysts. Yet given the sheer size of the country and the obscure nature of data, perhaps the best we can say is that China has problems. But which country doesn’t? We’re in a bit of a grey zone at the moment and more than ever China desperately needs close attention and understanding, especially at the edges.

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