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Fears that Chinese government and corporate sources are manipulating their economic statistics are reaching a crescendo. One economist described the recent trade data as "absurd," and the issue has very real ramifications for Canadian investors. If China is misstating its growth numbers, the apparent recovery in the Chinese economy could prove a mirage, threatening commodity prices and profit growth for almost half of all publicly traded Canadian companies.
The problem lies in the export data: statistics released Tuesday show a year over year increase of 10 per cent for Chinese exports. But the data included an unlikely 93 per cent surge in exports to Hong Kong that IHS economist Alistair Thornton described as absurd.
Jonathan Anderson of China-based economics research firm Emerging Advisors Group goes a step further. Mr. Anderson's research shows a glaring discrepancy between the exports China reports, and the imports reported by their trading partners. Either a large percentage of Chinese exports are disappearing during transport, or Chinese companies are inflating their numbers. (see chart)
Mr. Anderson also discusses the difficulties in understanding exactly how the data is inaccurate:
"A number of analysts have pointed to … a sudden shift in geography towards Guangdong and the south as evidence that trading firms may be "playing" with tax regimes and rebates. Others have suggested that this is disguised borrowing from abroad, as beleaguered local infrastructure vehicles, parent governments and their partner banks try to find ways to keep financial resources flowing. The trouble is, we don't have any clear corroboration for either story."
The stakes couldn't be higher for the mining and energy stocks that make up 40 per cent of the S&P/TSX Composite. Chinese demand is the primary determinant of commodity prices – demand from the rest of the world is reasonably stable. If China's growth is less than it appears, demand for copper, coal, iron ore and energy will decline no matter what the data says.
Scott Barlow is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here to read more of his Insights, and follow Scott on Twitter at @SBarlow_ROB.