120712 deeper slowdown suspected in china

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ASIA BUSINESS Updated July 12, 2012, 2:01 a.m. ET

Deeper Slowdown Suspected in China

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World

Ahead of the Tape

China Digs Into Its Pro-Growth Toolbox

Beijing Lifts Spending As Growth Weakens

By TOM ORLIKAndAA RO N BA CK

BEIJINGOfficial data due this week are expected to show growth in China slowing to its

lowest rate since the global financial crisis. But some economists say they are turning up

evidence that the true picture could be even worse.

China's National Bureau of Statistics is

scheduled to report second-quarter gross

domestic product growth on Friday, and

according to a Dow Jones poll of 15

economists, it is likely to show the

country's economy grew by 7.6% from a year earlier. That is down from 8.1% growth in

the first quarter, and the slowest pace since the first quarter of 2009.

Coming hard on the heels of a weak jobs report in the U.S in June, and fading business

sentiment in European economic powerhouse Germany, fresh evidence of slowing growth

in the world's second-largest economy would be a further blow to an already fragile global

recovery. If, as some economists suspect, growth is even slower than the official data

suggest, that would compound fears that China is poorly placed to help lift the world

economy out of its slump.

Economists have responded to long-

standing doubts about the reliability of

official data by constructing their own

indexes of China's growth. Typically these

are based on measures such as electricity

production, rail freight and real-estate

construction that should track growth

closely but are regarded as less prone to

political interference.

London-based research firm CapitalEconomics created its own index during

the last major downturn during the 2008-09 crisis. "We created a proxy of Chinese

economic activity in order to answer doubts about the data, somewhat to our surprise it

generally runs in proximity to the official numbers," said Mark Williams, an economist at

the firm. "But particularly at the beginning of this year they began to diverge. So doubts

about the quality of the data are justified."

Capital Economics's proxy indicator suggests that China's economy grew by around 7.6%

in the first quarter of this year, half a percentage point lower than the official GDP figure.

Similar results reached by other analysts

have led some to suspect that the data are

Economists who doubt the reliability of China's official

gross domestic product figures are using other methods

to measure China's growth and finding mixed results,reports the WSJ's Aaron Back.

News, Quotes, Companies, Videos SEARCH

Page 1 of 4Some Economists Say China's Growth Has Slowed More than Data Suggest - WSJ.com

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"smoothed" and become less reliable

during periods of rapid slowdown or strong

growthtimes when the margin for error in

calculating the true rate of growth also

may be higher.

Friday's numbers will be underpinned by a

new approach to collecting data on

industrial output, a key measure of China's

growth, accounting for about half of GDP.

Under the new approach, in place since February, China's biggest 700,000 enterprises

report data directly to the NBS over the Internet. That replaces a system where many

reported to local statistics offices, and information was then transmitted from town, to city,

to province and to national levels.

The latest approach is intended to

overcome one of the main flaws in China's

data systemexaggeration of the growth

rate by ambitious local officials. A notice

on the National Bureau of Statistics

website in February announcing the change called on businesses to "submit data

independently, resisting any attempts at interference."

That warning to avoid interference may have been prescient. A report in the Chinese

press in April, reproduced on the NBS website, cited many instances of abuse of the new

system, with some local officials requiring businesses to co-ordinate with local statistical

offices before reporting their data, effectively reintroducing the possibility of political

interference.

Responding to the reports of abuse in an

April statement, Ma Jiantang, the head of

the NBS, said "there are still a few low-

level officials that are ignoring the statistics

law and the statistics system, using overt

and covert devices, to interfere with the

independent and authentic reporting of

data by businesses."

Recently, doubts have been raised that

electricity-production datawidely viewedas a reliable proxy for China's growth, also

may be subject to political interference,

with suspicion that local leaders may be encouraging power producers to exaggerate

growth rates.

Standard Chartered economist Stephen Green thought concerns over the electricity data

were serious enough to warrant a switch to a new proxy for growthdemand for gas and

diesel. This replacement indicator, though, still suggests "sluggish growth rather than

recession," he wrote in a recent note, similar to the story told by the official GDP data.

Others believe fears of exaggeration in the electricity datawhich registered a dismal

2.7% year-over-year growth rate in Mayare overstated. Power generation is dominated

by five major state-owned companies in China, which together account for just over half of

total electricity outputreducing the scope for local officials to distort the data.

Mr. Lu, manager at a power plant in eastern China, a unit of the state-owned China

Guodian Corp., said the plant's output data are transmitted automatically by a computer

system to the local municipal statistics bureau. "We need to make daily, monthly and

annual reports," he said. "There is no way to falsify this."

Incentives for local leaders may be aligned against exaggerating electricity output. "They

have little incentive to over-report use of energy, including electricity, as Beijing imposes

increasingly restrictive regulations on energy use per unit of GDP on local governments,"

said Bank of America Merrill-Lynch economist Lu Ting in a note.

Yoli Zhangcontributed to this article

Enlarge Image

Associated Press

A construction worker climbs on scaffolding next to anadvertisement, high above Beijing's Central Business

District on Wednesday.

Enlarge Image




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A version of this article appeared July 12, 2012, on page A10 in the U.S. edition of The Wall Street

Journal, with the headline: Deeper Slowdown Suspected in China.

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120712 deeper slowdown suspected in china

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