While thumbing through the recent AT Kearney Report (review coming in a few days), I came across the above chart and knew it required its own post given all the chatter about China’s role in the recovery.

The quadrant titles – Return of PAX America, New Goldilocks, Great Depression II, and China Saves Capitalism – pretty much says it all, and while the recent news would seemingly point towards the “new Goldilocks” sector, more and more we are seeing signs that Goldilocks may have yet to find the porridge that fits her liking.

One of the interesting, and perhaps most debatable, aspects watching the “Road to Recovery” is the fact that so much can be made from a few statistical measures that are typically offered up without much context.

It is a situation that lead me to write a piece called Are Trade Statistics the Best Measure for Success? a couple years ago, and has kept me largely restrained in believing that we are near a bottom, or that we know what a “bottom” is.

Why I say that is simple. That high line numbers, the numbers reported and often quoted, are not necessarily the best measure of what is going on, nor do they tell the real story.

That with regional clusters (I say 5.. others slice up to 8), China is actually a to get that, one needs to properly dig down into China’s various regions and industries, and take the time to work out what is really going on.

In the first graph above, I have constructed a simple chart that shows the last year of export growth data by province.  The X axis is essentially a percentage gain/ loss on the previous year with the Y axis being the time period (Period 1 is March 2008 and Period 12 is March 2009).

To further highlight the fact that there are some really interesting dynamics occurring, and to ensure that the chart did not look like a plate fo spaghetti, I simply removed any areas whose export from period 1 – 8 had grown slower than the national average and then remove any areas where their growth was faster than the national average from periods 9-12.

Resulting in a very interesting chart that highlights the economic impacts on some of China’s fastest growing regions where industries were not quite as solid (Hebei, Shanxi, Henan, Hunan, and Guanxi) with a couple of interesting results from Jiangsu and Chongqing.

Going down another layer to break these areas apart even further through showed just how clustered the regions themselves are.

The Yantgze Delta Markets of Shanghai, Jiangsu, Zhejiang, and Anhui all stuck together falling  20% while the SEZs in Shenzhen, Shantou, and Zhuhai all took similar dives (Xiamen – center of Dell – fared much better).. and while Chongqing and Yunnan took similar dives, Sichuan saw the greatest provincial gain (surely in part due to recent attraction of FDI).

Which leads me back to the original point I was looking to make.  That while “China’s” economy has certainly grown on the whole over the last 20 years, and it has certainly felt the impact of the recent economic turmoil, its economy is not a single economy, nor will it act as a single unit.

Each slice that you take, and this chart will show you 40 more angles of the same figures, will offer a different view of impact on the China’s export economy, and that regardless of whether or not China’s economy has decoupled itself from the export economy.. it is clear that some areas within China are still very tied to it.

For those looking for good news on China’s property market, I am not sure if the recent JLL Property Market Monitor will be the document you were hoping for, but Steven McCrord’s Page 1 was sobering for me:

Total prime retail stock in 21 major Chinese cities will grow at a CAGR of 20.2% through the next three years, while retail sales are only projected to grow at 9.2%. The divergence between stock growth and retail sales growth will drive up the national vacancy rate from 7.2% at end 2008 to a projected 13.9% at the end of 2011.

A projection that has plenty of support in the 3 page document that highlights problems in the residential, commercial, and retail sectors (the one bright spot was reserved for infrastructure).

Download the full report here

following last week’s news that China had accomplished a miraculous 6.1% growth in the first quarter of the year, UBS released their updated projection for 2009 on Thursday.

With the previous change to 6.5% being brought about by a weaker than thought 2008 q4, Wang Tao and her team now see this 6.1% as a sign of a solid foundation going forward:

While the external outlook remains bleak, there have been signs of domestic activity picking up in China, as a result of the government’s policy stimulus. Q1 2009 growth rebounded on a quarter-on-quarter basis. Most importantly, we expect that the explosive growth of bank lending since late 2008 will lead to a surge in government-mandated investment in the coming months.

Supported by a an interesting table below where we can see that the recent upgrade comes largely from a 10% increase in expected consumption, and a more than 25% increase in the fixed investment.

It is a forecast that is hedged by a few issues that they see going forward, issues that could bring further adjustments:
1) Further falloff in exports
2) Further falloff in real estate

In my post earlier this week, March PMI Data for China Out, I focused on the fact that CLSA and CFLP came to some very different conclusions about March’s PMI data.

For my part, I saw where both groups had the potential to see different data, and in the article What is behind different PMI statistics released by CFLP, CLSA?, it is clear that the CFLP believes it has “the” data.

Chen Zhongtao, a senior economist of CFLP told Xinhua that both organization used the same analyzing methods, but the difference came mainly from sampling disparities.

CFLP surveyed 730 companies, which provided a broader coverage compared with CLSA’s some 400, he said.

An interesting position considering the fact that statistically neither sample is considered big enough to be within the +/- 2 anyway, an issue CSLA essentially brushes off. However, more to the point, where it appears to me there could be some very interesting difference is in how the groups adjusted the data:

“It is true that the CFLP survey sample size is larger than that of the CLSA China PMI…therefore the standard error of the (population) estimates from the CFLP survey should be around 25 percent smaller than those from the China PMI,” said the note released on April 1.

“However in practice all of this is academic. Differences in the samples are dwarfed by differences in how each set of statisticians adjust for seasonality in the data,” said the note.

Whether statistically adjusting, tweaking, or finagling the numbers, one has to be careful not to hammer a round peg through a square hole. It is a process that is part science (math), part art, and a lot of gut checking as adjustments are made, a reason why many jr analysts spend long hours staring at excel.

Where I believe this is one of the critical factors behind the difference, leaving the quality of data aside, is that CLFP adjusted the number 3 points for seasonality (meaning unadjusted was 49.4) and they have also used past year performance as a means to develop their adjustments as well – perhaps not the best thing to do give the last 9 months of economic data most would rather forget.

However, more important to understanding what is really going on is to understand motives, which can best be summed up through the following comments:

Zhang Liqun, researcher with development Research Center of the State Council, said the rising trend of the PMI indicated improvement in overall economic performance and would continue in the second quarter with stimulus policies continuing to pay off.

“The fact that the PMI rebounded above 50 percent in March, especially that the indices for output and new orders have stood above 50 percent for two consecutive months since February, implied future acceleration in the country’s economic growth,” Zhang said.

Which in the end, says it all for me. It is not that I would say CSLA’s numbers are on the mark, but it is highly likley in my opinion that with all the pressure to hit the 8% growth figure, the NBS and CFLP needed to show that things were past the 50 yard line.

A quick follow up to yesterday’s post China’s Economic Exposure and Forward Policies , one of the more interesting offshoots was a back and forth on the risks found within Chinese banks.

It was kicked off by Victor Shih, when he was responding to a comment made by Quoc and said:

My argument is that China is in exactly the same position as the US, if not worse.  Please bear in mind that for the past few years, the PBOC issued 10 trillion in notes to sterilize. This is 10 trillion RMB that the PBOC OWES the public. The China Development Bank like wise issued trillions to finance public projects; again, this is trillions that CDB OWES the public.  We can go down the list and find hundreds of local government investment entities which have issued and borrowed additional trillions.

Victor’s comment was then picked up on by Yalan, who said:

China´s public debt around 30% GDP, US around 70% GDP, Japan 170% GDP.

Short-term sterilization T-bills are just that: FX sterilization securities – rapidly unwound in case of a reversal of volatile flows (India as a case in point). US T-bills issuance ain´t for sterilization but for funding needs.

I beg to disagree: CH is not in the same position as the US.

Which, brings us to the question I believe is the most important (at least it is for me). Taking Yanlan’s numbers at face value, and taking into consideration Victor’s comments, it is clear that both have placed a different risk premium to both China and the US.

In exploring this issue, I submitted the following response – and it is a response I would encourage others to consider and comment on:

Where I see the real difference between China and US at the bank level is that effectively 30-40 banks have been lost in the US without a complete collapse in the system as a whole. There have not been runs of banks at a macro level, and confidence in savings accounts is still there.

But, would the same hold true in China were the same conditions present???

I fear not. China’s system is far more vulnerable to shocks and runs, and were one of the big 4 (perhaps even a large regional) to be seen as failing, my bet is we could see a quick reaction in the market place as people began lining up at the ATM… Remember the lines in 97?

This is where the real risk is (In my opinion). That China would not have to support a single bank, but all of them.

So, Ya Lan, to your point that China is in a different situation, I would agree because from a pure numbers analysis, this look very different – and appear to be in China’s favor.

However, I would also say that as the risk premium in China is far higher on a system wide basis, which adjusts the figures you have put forward to be at a much higher level.

Sound credible to you?

If credible, what risk level on a scale of 1 to 10 would you give each (US and China), and what implications would any difference have when considering that China has once again opened a flood gate of new loans onto the system? Are we looking at 3-5 years from now a Chinese banking system that is suffering from its own subprime like meltdown as non-performing loans begin to weigh down on China’s banking sector?

Friday’s news that China’s PMI climbed over the 50 yard line to reach 52.4 in March came as comforting news to many of the China’s media outlets. It has been nearly 6 months since this figure was out of the red zone, and it provided an opportunity for policy makers to tout the success of their 4 trillion dollar stimulus.

CLSA however remained far less optimistic of the rebound as their own figures (as reported by the WSJ article China Factory Data Suggest Recovery ‘Still in First Gear’) show that any recovery is still in its infancy (if there is a recovery at all) and that celebrations are still premature:

Manufacturing activity in China declined in March for the eighth consecutive month as prices and new orders continued to weaken, according to the CLSA China Purchasing Managers Index issued Wednesday.

The index, a gauge of nationwide manufacturing activity, fell to 44.8 in March from 45.1 in February, CLSA Asia-Pacific Markets said.

Interesting to note here that CLSA is coming out to say that the governments figure is off nearly 8% (gov’t line is 52.4 / CLSA is 44.8).

More specifically though:

The new-order component of the index dropped to 43.6 in March from 44.2 in February. At the same time, downward pressure on prices from idle capacity appeared to worsen. The output prices index dropped to 41.3 in March from 45.6 in February.

which is contradicted by the NBS statistics:

The output index rose to 56.9 percent in March, up 5.7 percentage points from the previous month. The new order index jumped 4.2 percentage points to 54.6 percent.

The index measuring new export orders rose 4.1 percentage points from February to 47.5 percent. The figure, although still below the threshold of expansion of 50 percent, showed the depth of decline has been narrowing.

“The continuous rebound of the PMI not only shows the government economic stimulus package has begun to take obvious effect, but also indicates a stabilizing and warming economy,” said NBS head Ma Jiantang.

so who is right? what is going on here? Is China’s NBS (National Bureau of Statistics) putting lipstick on the pig, or is CLSA simply looking to grab some headlines by being the open contrarian?

.. and what does any of this mean really, and if we were to assume for a moment that the 52.4% was a true figure, what should we make of it?

So first, who should we believe? This is an issue that I have faced in China when looking through statistics from nearly any reporting group, and my honest answer has always been not to believe anyone. To use the number as a starting point, but to then look at what was going on around me to put together a picture relevant to me and my clients.

the NBS has historically done a poor job of presenting the picture as a result of 2 things: biased reporting on the ground (i.e. local NBS officials inflating/ deflating numbers per their need) and inconsistent reporting (i.e. different regions reporting different numbers via different reporting formats). Taken at face value, this number should actually be unaffected by both as it is created from a group of 700 manufacturers, and is a targeted number that should not have any material differences when asked. However, where the statistical errors are going to enter into the picture is the fact that a large number of those 700 firms are going to be large private/ state conglomerates who have their own internal reporting issues, and who know that they are supposed to do their part to support the stated goal of 8% and a recovering economy.

CLSA on the other hand, Like UBS and many other banks, is developing research for their clients and to develop new clients. so, it is part research and part brochure (I don’t mean it to sound like a bad thing). However, through these documents they have a few systemic issues that are going to skew their results. first, as it is a marketing document, they need to appear to be a knowledgeable source while at the same time providing number that are desperate from the governments – they cannot give their clients the government line. Second, their access is going to be limited. While I believe that their data has a much lesser degree of adulteration, I must also recognize the fact that their data is perhaps going to be skewed as their sources will be different than the government sources. Not always a bad thing, but could explain why there is a difference.

What do the numbers mean to me? Little. Last week, while traveling by bus through Zhejiang it was abundantly clear that the manufacturing sector was off. Way off. In one city alone, I only saw 2 factories (in roughly 20) that had bicycles out front to indicate that laborers were working. It was not a town of dormitory factories, but one where residents would ride to the office. So, 2 of 20 were operating. Speaking to several other friends in textiles, auto, and consumer goods, and the stories of closed factories and layoffs were alarming.

Additionally, and where I am myself a bit alarmed… assuming the PMI did reach 52.4 percent, and it was the result of the massive stimulus and massive amounts of bank loans, the ROI on the stimulus was horrible…. In fact, for all the liquidity and preferential policies that have been unleashed in the market, the fact that it has only now crossed the 50 yard line – and barely at that – signals that we are really in trouble.

the US is still contracting, EU is still contracting, and China is eeking out … and we have already been through the easiest money of the stimulus. Every bit of the next waves are more expensive to fund, and unlike the first wave from the major powers earlier this year, some very difficult decisions will have to be made at the global economic level that I believe few are prepared for (see victor Shih’s recent article Legless Stimulus in China and Paul Krugman’s recent article China’s Dollar Trap

In closing, regardless of whether or not the NBS or CLSA are right, calling the recent developments as a rebound after 4 months of improvements I believe is premature. there are still signs of problems everywhere, and while one could argue the money spent has bought a economic reprieve from the worst economic decisions, the fact is that without a sustainable stimulus and a overhaul of the systems to address core issues, we could still slip back below the line.

A few weeks back while writing up the post on imploding February trade figures, I wrote about the fact that imports in my eyes were not an indicator of domestic consumption (i.e. Chinese consumers buying finished goods), but of domestic industry buying raw materials/ semi-finished goods to then be resold elsewhere.

It is an important distinction for me, as essentially the import figure becomes a leading indicator for recovery.. or at least of orders going forward.. and the recent UBS reports Who Is Most Exposed to China’s Domestic Economy? and China Exposure Chartbook have a couple great charts and a piece of analysis that I think goes to this point.

Taking a look at the charts, one can see on the left that Korea and Taiwan have just been hammered, an interesting note when seeing that 24% of all imports are electronic parts (a category that Taiwan and Korea are big exporters of), while at the same time seeing the the cliff diving Australian fall off … which is clearly tied to the 23% minerals category.

the piece of analysis that I thought was most suitable for the discussion was:

China imports two key categories of products from abroad, processing inputs that are mainly used for the
assembling of exports, and commodity and capital goods (machinery, equipments, metals products) used mainly
for domestic needs. The main exporters of commodity and capital goods to China include Australia, Brazil, the
EU, Japan and Korea (Chart 1), while the main exporters of processing components to China are mainly regional
economies such as Taiwan, Korea, Malaysia, the Philippines, and Thailand.

So, when lumping it together, and why I suggest you email me for a copy of the reports, is that while I was at one time saying that imports were a leading indicator of China’s rebound, I clearly failed to draw the complete line as the rebound in china’s imports will acutally be a sign that other economies are rebounding.

The question for me is who is the chicken and who is the egg.

If the US (let’s assume a recovery requires US demand side participation) were to start ordering, I am now of the opinion that China would really be second in line for a reound.  that while china’s factories would be in the dugout warming up, it will be Japan, korea, and Australia who see the initial orders for parts and have to fliop their industrial lights back on first.

With one of the primary measurements of China’s economic stability/ success being the number of people it employs, and the fact that it must create 20+ million jobs a year just to absorb the new entrants to the work for, it should come as no surprise that Beijing wants to look like it is proactively looking to calm this market.

Through mobile news and spam advertising campaigns is making sure the word is out, and the campaigns have most recently increased in frequency. One of which is below:

For graduating students who are
1) willing to work for jobs in central/ west regions for SME
2) willing to join armed force
3) willing to be volunteer for western development program
4) Willing to join country/ regional R&D project
5) Have a family with “difficult position” – typically refers to financial difficulties

Benefits:
1) Tuition reduction/ payments
2) Loan repayment
3) Extra bonus points for grad school
4) no exam if you continue study as adult (2nd bachelor degree)
5) Will be given priority if want to enter political/ legal school

In many ways they are going to offer chances for some to get some interesting practical experience and some decent reward for their “sacrifice”, it is an Americorps of sorts for Chinese students, and with the proper training and management it is through programs like these that a measure of improvement can be achieved (particularly #3 and 5)

Where I myself am hoping to see further announcements, is particularly in the fields of science and engineering where a green corps can be developed working on developing and implementing sustainability goals. More than just solar panels and hybrid cars, I see this as a huge opportunity to bring up the level of practical experience within a group that many feel is lacking (i.e. China has 200,000 engineers, but only a few are ready for a job).

At the same time, for firms operating in China who are creative, I would say that there is an opportunity here as well to work with the various agencies responsible for this to offer training, project management, and act as an intake when these groups are complete with their commitments. More than likely, their experiences will provide more grounding than had they been fresh grads on the prowl, and with some measure of practical experience under their belt, they are going to be a lot more useful as well.

Update: China Daily is reporting up to 70% of upcoming grads do not have jobs yet. Still have 3 months to go, but this figure is alarming none the less as typically students have their job offers secured well in advance

When speaking on the economic ripples that are being felt in china, one will often hear that there is little to fear. that because the layoffs are primarily coming from the blue collar/ migrant sector, that the pain is not being felt in China’s largest cites, that everything will be fine. that consumer confidence will stay high, purchasing wil remain stable, and that this will in essence allow China to bounce back faster than others.

some of these underlying assumptions, are beginning to be tested, and while there are some who would like to point to a single number as a source for hope, my hope of a quick correction continue to be tempered by what I am hearing on the street and reading in the papers.

The recent article Middle class set to feel the pinch is yet another example, but perhaps more than others in the past, this one is more concerning to me as it is essentially showing that another one of fears is coming closer to reality…

A recent poll by Sina.com found that 26 percent of employees were “extremely anxious” about their jobs; another 35 percent said they were “worried”.

In another 2008 survey, 70 percent of respondents said the financial crisis had greatly affected their mental state; another 10 percent said they felt like they were “on thorns” over the possibility of losing their jobs.

“It’s no longer a question of job pressure,” said Lin Qiang. “Now it’s a question of survival.”

Now that the press is beginning to report that your average Zhou is worried about their jobs, and they are releasing statistics to show that consumer sentiment is tanking, it is just one more reason why we need to once again adjust our predictions downward and spend time thinking about what these numbers really mean and how to adjust business plans to prepare for what is surely NOT going to be a 2nd/ 3rd quarter recovery.

So, with that, what should we make of the numbers.

Going forward, what are the most important numbers to look at? What other measures would you be looking out for as a litmus for continued downside or a turnaround?

More importantly – what are the next set of ripples should we see layoffs, increased savings, etc? Futher closures at factories? Reduced materials imports? How far does it go???