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Bloomberg: Inflated Notions

April 21, 2012

Early last week, I went on Bloomberg to talk about China’s latest economic figures, and boy did I kick up a hornet’s nest.  In a nutshell, I said that I was finding it harder and harder to reconcile China’s official CPI, GDP, and PMI numbers with what I was seeing and hearing on the ground.  The interviewer, Susan Li, appeared surprised by my comments and Shanghai-based blogger Adam Minter called them “unspeakably stupid.”  You can click here to watch for yourself.

The key to understanding my remarks is that they are a reflection, not of certainty, but uncertainty.  Watching Susan’s reaction, one might easily get the impression I’m handing down a verdict, that I know the official numbers are wrong because I know what the real numbers should be.  In fact, I’m struggling with a dilemma:  how do I speak to what the official headline figures are telling us when they appear to be at odds not only with my own personal observations, but with other official data that are probably more significant and revealing?

In my Bloomberg remarks, I made three core assertions:

  1. That the reported decrease in China’s consumer inflation rate (CPI) does not seem to accord with my own daily experience of rising prices in China;
  2. That there is reason to suspect the Chinese economy may be growing substantially below China’s reported real GDP growth rate of 8.1% for Q1, and may actually be in contraction (negative growth); and
  3. That Chinese companies I have been talking to are seeing flat performance (near zero growth) in Q1, compared to last year.

Each of these are worth looking at in turn — particularly now that the main economic figures for March and Q1 have been released and can be examined in detail.

My first assertion is that the decrease in China’s consumer inflation rate (CPI) — 3.6% in March, down from a peak of 6.5% last July — does not seem to accord with my own daily experience of rising prices in China.  On Bloomberg I offered, as a counterpoint, the fact that the price of the fresh milk I have delivered to my home had, just that weekend, risen by 33%, from 6 yuan/bottle to 8 yuan/bottle.

Now I want to be clear that I am not claiming consumer inflation in China is actually running at 33%.  I’m simply offering an example of the kind of head-turning price hike that remains an all-too-frequent experience despite the government’s declared “success” in getting inflation under control.

To be fair, this particular price hike is more likely due to rising delivery charges than the price of milk itself.  The Chinese media has been buzzing these past few weeks about rapidly rising logistics costs, across the board, which are expected to translate into even greater price hikes in the weeks and months ahead.

But food itself has long been a source of concern, and this is hardly the first time I’ve noted a disconnect between my own observations and the official numbers.  Back in August 2010, before inflation really took off, I wrote a post on the “KFC Index,” noting that the price of my own regular meal at KFC had risen by 32.6% since the year before, from RMB 21.50 to 28.50, far higher than the official rate of food inflation.  After my Bloomberg appearance last week, I figured I ought to check out and see where it stood now.  The same meal — large popcorn chicken, small fries, large Coke — now costs RMB 33.00, a 53.5% increase since I made my first observation, two years and 8 months ago.  On a compounded annualized basis, that works out to an inflation rate of 17.4%.

Two years ago, a business buffet I often go to charge RMB 99/person; it now costs RMB 158, a 61.2% increase, or 27% on a compounded annualized basis.  Our local foot massage place (a popular pastime in China) recently raised its prices 20%, from RMB 168/hour to 198.  Gasoline prices at the pump in China are more than 50% higher than three years ago, rising 10% just this last month — the second hike in less than two months — as you can see in this Reuters video.  (China’s elimination of fuel subsidies, which kept gasoline prices artificially low, is probably a good thing on balance, since they encouraged over-consumption, but it still hits people in the pocketbook.)

Some have suggested that the price increases I’m seeing reflect a higher rate of inflation in Beijing than elsewhere in China.  That’s certainly possible, but it doesn’t help reconcile them with official figures.  According to the official CPI numbers for February, inflation in Beijing stood at 3.5%, barely above the national figure of 3.2% for that month.

None of this necessarily means the National Bureau of Statistics (NBS) is lying, or making up numbers out of thin air.  CPI is calculated based on a basket of goods, the exact composition of which is not disclosed by Chinese authorities, although some analysts have done a decent job of trying to re-engineer it.  I’m sure you could come up with a basket that shows consumer inflation at 3.6%.  Whether that reflects what consumers are actually feeling, though, is another matter.  The picture is complicated by the fact that the government knows what is in the basket and can target those items for price controls and other forms of intervention.  That keeps the prices for the select items — and the index — down, for a while at least.  But it doesn’t solve price pressures, it only distorts their impact on the economy.

Last summer, for instance, the Chinese government dumped a big chunk of its 220,000-ton strategic pork reserves onto the market.  That helped ease prices, but it also lowered the profit incentive for farmers to raise and supply hogs, which could lead to shortages and/or higher prices in the long-run.  The government fined Unilever for talking about raising soap and detergent prices due to soaring raw material costs.   Although it later allowed those price hikes to go forward, the government leaned heavily on both Chinese and foreign companies to avoid raising their prices.  Such practices continue.  Just last week, the NDRC pressured two Chinese cooking oil producers into postponing a planned price increase for at least two months, and called Nestle in for “consultations” over a recent increase in the price of its baby formula products.

And then there are taxis.  Besides a negligible (1-2 yuan) flat fuel surcharge has been added, that rate for taxi fares in Beijing hasn’t changed since 2006 (six years) even though fuel prices in that period have soared.  The result is a dire shortage of available taxis, especially at peak periods, despite the fact that most people I talk to in Beijing — and I’m talking local people, not foreigners — are able and willing to pay more, if it meant they could find a cab.  I’m told, by reasonably reliable sources, that the reason the authorities refuse to raise the fare is that taxis are in the CPI basket, and it would boost the official inflation figure.

A critic might contend that, because I’ve been warning of the dangers of inflation to China for some time, I’m just reluctant to accept the official figures now that they inconveniently contradict the story I’ve been telling.  This kind of argument is a major reason why I’ve resisted raising my concerns about the official data: once we start throwing out numbers we don’t like, it’s hard to know where to draw the line.  The truth is, however, I don’t feel like I have anything at stake here, one way or the other.  My warnings about inflation (here and here) were born out long ago:  inflation rose higher, and remained higher longer, than either the government or conventional analysts were predicting in 2010.

Now that the monetary expansion has peaked, and China’s investment boom is slowing (more on that in a moment), one would not be surprised to see prices dropping — even collapsing — as a result of the inflationary bubble popping.  In fact, that is precisely what we are seeing in property and property-related inputs.  The -0.3% drop in the Producer Price Index (PPI) matches up well with the the industrial slowdown I’m seeing.  We may yet see a downturn in wages if that slowdown continues or deepens.  But for a number of reasons, including people cashing in inflated assets, as well as the bottled-up pressure from earlier price controls, the everyday cost of living continues to rise.  That suggests that inflation is turning into stagflation, a problem that places serious constraints on the Chinese government’s ability to pump money in to reignite growth.

There is no way to definitively prove that prices in China have risen, and continue to rise, faster than official CPI indicates.  One could, of course, devise a transparent basket of one’s own and collect independent price data from cities across China.  But the Chinese government strongly discourages such projects, to put it mildly.  Absent an alternative measure, we are left with impressions and pieces of data.  However, the fragments I’ve pulled together here offer some basis for asking skeptical questions about whether China’s latest CPI figures fully capture the everyday impact of inflation or the real constraints on Chinese policymakers.

I’ve covered the first of the three assertions in my Bloomberg interview.  In the interests of readability, I’m going to break here for the moment and examine my second controversial assertion — that China’s economy may be slowing more severely than the headline GDP number suggests — in my next installment.

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31 Comments leave one →
  1. April 22, 2012 9:17 am

    Sorry to tell you this buddy. Here in Canada we also see 10%/year food inflation despite official inflation perennially under 2%. Fact is, governments everywhere have their own inflation calculations that have nothing to do with what you and I see on the ground.

  2. April 22, 2012 1:14 pm

    Many people have the same anecdotal analysis of inflation in the USA. “When I go to the store, banana prices have gone up 50%, but the CPI from the FED shows only 2% inflation..” I don’t believe this anecdotal analysis is true for the US. The main reason is that labor costs are not rising. Nobody has been getting raises in the US. Additionally, the unemployment rate is so high – a lack of overall inflation pressure on the American economy. Finally, MIT’s billion prices project verifies 2-3%.

    For China, you point out that labor costs are rising (you strangely state it might not add to your case though? are not delivery charges for milk the same as rising labor costs?). I believe that getting a job is easy in China and unemployment rate is low. That’s a lot of inflation pressure and the press keeps pushing “the end of cheap china” articles with reports of 20% raises for factory workers. I agree that your disbelief of the official CPI is warranted – except the rents on those apartments that cost a crazy amount almost do not budge…. how can the yield be so low… Like you said about the taxi drivers, push the air in the balloon around until it pops…

    • Barry permalink
      April 24, 2012 7:26 pm

      My experience can be called anecdotal but my wallet thinks it is something else .I run a food budget for our family and we track expenses very closely each week I record what I buy and the amount I spend from a shopping list that we generate every week this notebook tracks back for about a year.I clearly see price increases on a number of items in the U.S. When an item takes a price increase the average percentage change is 15-20% if cream cheese used to cost .99 and now costs 1.19 that’s a real life 20% increase .Container sizes are decreasing usually I notice around a 20% decrease when this happens even if the price doesn’t increase you are still getting less product . The bottom line as my wallet sees this as an annual inflation rate for the grocery bill of around 10%..With cost of living increases at a 0-2% rate and non discretionary costs increasing well above that we have an unsustainable situation.that can be ignored for a while but not forever.This also holds true for government budget deficits of 10% in 0-2% growth rate environment .

  3. Sean permalink
    April 22, 2012 3:13 pm

    Patrick, Take a look at Yum’s latest quarterly. They give the inflation they’ve seen: “wage rate inflation of 17%. Commodity inflation was 10%.” Check with the official statistics. Food inflation was 8%, meat inflation was 14%. So I’d say that KFC reflects the official statistics pretty accurately.

    If you’re going to use a KFC index, at least follow the company’s reports closely enough that you don’t contradict the very thing you’re holding up as a standard.

  4. April 22, 2012 4:33 pm

    I am with you on this. I am in the Uk but my wife is Chinese. She recently returned from China and said that food inflation was very noticeable, apparently Pork is down a bit but then it doubled last year when I was there! Her former colleagues in some of China’s largest state companies and contacts in the provincial government (one of the richest) are all worried. Contracts are not being paid and money is not flowing from government as before. Her sibling works in a very large multi national transport company (not Chinese but based in Shanghai) and they too are struggling to keep income at 2011 levels! In the Uk a quick trip round the local Tesco or similar, checking the country of manufacturer of clothing items in particular, will reveal a distinct lack of the once overbearing “Made in China”, now it is Indonesia or India etc. In the past when economies price themselves out of the market it happens fast, a year or so. The acknowledged need to change the balance of the economy in China is probably correct but delivery, even without all of the huge drag corruption and an ossified political system brings, will take a decade or more. For the Chinese this requires a vast cultural change of attitude towards money. This change is unlikely to come about until the government provides much greater life security (health service etc) and money is much more evenly spread through the economy. What if the Government runs out of money before these changes are properly in place? It is a fair bet neither will happen any time soon. Finally in this comment, and as part of my belief that you only need to look at the common sense macro indicators to get a reliable indication of what is happening. If huge numbers of rich, otherwise patriotic and nationalistic Chinese are moving their families and fortunes to foreign shores, I suspect the walls they look at contain writing that does not tell a good story. I would suggest the writing is not invisible to others, simply, at present it is more like the Emperor’s clothes, which I guess Patrick, makes you the small boy looking on. No offence intended!

  5. Glen permalink
    April 22, 2012 10:19 pm

    Just how does the government discourage alternate inflation data collection?

  6. advsys permalink
    April 23, 2012 5:03 am

    The U.S. is no different. Monetarty easing/growth in the supply of money won’t be tolerated if inflation appears to be increasing. The CPI has been re engineered several times since the 80′s to make it appear that inflation is under control. Weighting is one of the tools that allows the government to perpetuate the un truths. As health insurance rises, it has become a smaller and smaller portion of the total calculation.

    The one possible difference is that in the U.S. all of the changes to CPI are well documented. A simple search gets you lots on weighting, substitution and Hedonics. It is easy to find out when each change is made. The surprising thing here is that no one cares. We seem to be very complacent about lies like this. So, the gov’t takes no heat for these misrepresentations.

    R

    • andao permalink
      April 23, 2012 1:11 pm

      The US IS different in that any university, think tank, or individual can do their own research into inflation and publish their results widely. In China (like PM 2.5 readings for air quality), this type of independent research simply isn’t allowed, as Patrick mentioned.

      • advsys permalink
        April 23, 2012 2:57 pm

        Agreed and those numbers are ready available. Yet, that does not mean that they become the main message. It still all boils down to whether the correct set of numbers is being used when applying policy and for analyzing how well the economy is doing. The answer is Nyet.

  7. The Digit Man permalink
    April 23, 2012 12:37 pm

    The most recent HSBC flash PMI (independent) is quite at odds with the last NBS survey and many many more partial economic indicators … someone is hard-keying their data !

  8. andao permalink
    April 23, 2012 4:54 pm

    “China to invest in infrastructure to bolster growth: report”

    http://www.reuters.com/article/2012/04/23/us-china-economy-investment-idUSBRE83M00W20120423

    They’re doing it again!

  9. JGW permalink
    April 23, 2012 11:59 pm

    For her sake I hope Susan was just having an off day.

  10. princess1960 permalink
    April 24, 2012 12:10 am

    i read and i understand CHINE is the country when the economy looks grow and this is because the tax is not higher ..so is oportninity who’s can make investiment there is with profit too. this i know becouse many big or small munifactory or havy industry have been in chine just for profit ..this is good for the momentium ..but you are unbelieveble very good . thank you ..my question is why you give so much attention to CHINE?

  11. Alex permalink
    April 24, 2012 12:16 am

    A basic heuristic that has served me well in the past is: Adam Minter is almost always wrong. He’s just not very smart, although he’s pretty good at pretending.

  12. April 24, 2012 8:35 am

    Patrick, please, save yourself the trouble next time and get straight a couple of basic lessons in modern public relations:

    1. Get used to the soundbite. I know, I know, it’s simplistic, it’s glossy, it’s bubble gum, it’s dumbing down, but you know what? Until you’re running your own media network, this is the lay of the land. Take it from a former reporter: leave the multisyllable words at home and leave the “one the one hand, on the other hand” econo-speak at home. Journalists, particularly on television, want and need resolve in their sources.

    2. Bloomberg, though once upon a time a place serious investment professionals could depend on for deep and thorough analysis, is sadly going the way of the Foxes and CNNs of the world. What this means, among other things, is that there’s a vested interest in bullishness, generally…unless the train wreck is blatant and screamingly obvious in front of all our faces (See ongoing examples of Bo Xilai in China, Repsol YPF in Argentina, Silvio Berlusconi in Italy) in which case the opposite is de rigueur: pile on to the scandal and fan the flames higher.

    3. That said, there is currency in being a contrarian–witness the rock stardom of Nouriel Roubini, who is nothing but a doomsayer. As the old saying goes, a broken clock is still right twice a day, but Roubini has raised this to an artform and has got the entire global financial media establishment eating from the palm of his hand. I’m not claiming Roubini has right or wrong, nor am I claiming that you have it right or wrong. All I’m saying is pick your stance and own it. In the video you definitely don’t come across as assertive enough. Which leads me to my next point…

    4. When being interviewed on television, don’t be afraid to cut off or step on the interviewers’ words or interjections. Any on-screen talent worth his or her salary is all too aware that when multiple voices are trying to talk at the same time on television, none will be heard, and the interviewer will ultimately back down and let you finish your point rather than fruitlessly try to assert whatever point of view he or she is trying to push into your face.

    5. Finally, regarding the actual substance of your assertions…you’re not alone and this is not just about China. Inflation, as a concept, I am beginning to think is too abstract for the narrowing spaces served up by contemporary discourse. Personally, I’ve been skeptical about China’s official numbers for quite a while now, but who am I? I have zero skin in that game, which, depending on your perspective, makes me either the most trustworthy or least trustworthy opinion around.

    • princess1960 permalink
      April 29, 2012 4:33 pm

      i think you have to try to learn something from N.ROUBINI ..you have this privileges from inf tech.. your comment doesn’t sayed nothing new to me .. thank you

  13. Bloomberg_Mikey88 permalink
    April 24, 2012 8:50 am

    Isn’t Minter a Bloomberg columnist?

  14. Hua Qiao permalink
    April 25, 2012 3:16 pm

    It would also be good to look at the gdp deflator as compared to the CPI. Although the gap between the two numbers narrowed in 1Q2012, China’s GDP deflator was significantly above the CPI for all of 2012. In this link, you can see a graphical representation.

    So Mr. Minter’s comment only reveals how much of a puddin’ head he is. There absolutely is reason to question the CPI number.

    http://www.alsosprachanalyst.com/economy/chinas-gdp-grew-by-8-1-in-the-first-quarter-2012-missing-estimates.html

    • Hua Qiao permalink
      April 25, 2012 3:17 pm

      Sorry i meant “for all of 2011″.

  15. James permalink
    May 2, 2012 12:56 am

    Borne out. Not born out – unless a baby was produced.

    • lpm permalink
      May 24, 2012 11:36 pm

      THANK YOU. So I am not the only one who noticed that!!!!!!

Trackbacks

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