Why China’s Economic Data Flunks The Test

China

It’s not the first time that China’s economic numbers have both raised eyebrows and invited scrutiny.

China surprised analysts and experts this week by reporting a monthly national trade deficit of nearly $9 billion, its first in three years as imports rose 45% in February. But, according to the Wall Street Journal, these same experts were even more baffled when China furthermore reported a surprise increase in foreign currency reserves, which usually trends down – and not up – amid rising imports.

Investors and economists say that this pattern of opaque reporting of data creates risks for investors in the world’s second-largest economy. (For more, see: Can the Economic Data From China Be Trusted?)

Interpreting China’s Economic Data
China is still controlled and regulated heavily by its central communist government, where the reporting of data is not carried out by an independent third party. Therefore, the data that comes out of China is prone to manipulation and exaggeration in order to paint a rosier picture in times of economic malaise. But sometimes, as in this week, the data coming out of the country are simply baffling. For starters, China reported its first monthly trade deficit in over three years as imports jumped both in January and February. At the same time, Chinese officials separately reported a surge in foreign currency reserves – which economists would expect to drop amid rising imports. According to the Wall Street Journal, this has left economists and investors scratching their heads. (See also: 5 Things to Know About the Chinese Economy.)

Secondary source: WSJ

The reason for this apparent contradiction is that as imports increase at the expense of exports, leading to a deficit, the central bank would be motivated to support its currency by selling foreign currency from its reserves in order to purchase local currency, the Yuan (CNY), in the open market. Also, Chinese importers would need to fund overseas purchases using dollars, adding a further drain to reserves. Some economists have pointed out that a strengthening dollar could moreover reduce the total nominal value of reserves by reducing the relative value of other foreign currencies being held such as euros and yen, predicting that this effect would lower the value by $20-$30 billion, according to the WSJ. However, Chinese officials reported a net gain in reserves of nearly $7 billion, putting the total value of reserve up above $3 trillion.

Analysts can only speculate for the moment what sort of confluence of economic and fiscal activity has produced these competing results. Either way, these reports are creating confusion among investors as they weigh their next steps in China. (See also: China’s Economic Indicators, Impact On Markets)

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