Two wrongs don't make a right line

Hong Kong registered its lowest rate of economic growth in more than two years in the first quarter, with a slowdown on the mainland having a knock-on effect.

SCMP, May 12

Maybe this town is changing but it certainly didn't feel to me like three months in which the economy grew by only 0.4 per cent year over year.

What is more, I think the hard numbers actually confirm what my antennae tell me. Two highly volatile components of GDP - net trade and change in inventory - have interwoven their uncertain influences to depress the official growth rate in a way that does not really reflect what happened.

Net trade in particular stands out. We have an unusual economy in that total trade - exports and imports together - is the equivalent of more than 400 per cent of GDP. The comparable figure for the United States is only 32 per cent.

Of course, it is only the net of these two - exports minus imports - that is taken as the contribution to GDP, and this is a much smaller figure. But it doesn't take much change in either exports or imports, or in their relative pricing, to bring about a big swing in the net figure.

Net trade and change in inventory together amount to only about 5 per cent of total GDP at present and so you would think they could not do all that much to change the overall GDP growth figure.

But think again. The blue line in the chart shows you the official GDP growth rate over the last two years. The red line shows you how that other 95 per cent of the economy performed. Find the slowdown. Go ahead. Try.

The fact is that the two largest components of GDP remained strong. Personal consumption expenditure (you in the shops) grew by 5.6 per cent while domestic fixed capital formation (buildings and machines) bounded a stellar 12.2 per cent. Donald is ending his term of office with as much concrete pouring as he can get in.

We have a constant problem with the net trade figure. It's called money laundering. Re-exports, which account for 98 per cent of total goods exports, are imports to which we contribute further processing that adds an average of 15.9 per cent to their value before we export them again.

That is what our statisticians say, anyway, and it implies that we have a re-export processing industry with revenues of about HK$460 billion a year, or about a quarter of our GDP.

Find it if you can. You'll sooner find blue cheese on the moon. It doesn't exist. All we really have is people changing the paperwork that accompanies these re-exports so that the profits are booked in Hong Kong, which does not tax them, rather than on the mainland, where Beijing does tax them. It's just money laundering.

And of course this causes confusion when totting up the GDP figures. We cannot really determine Hong Kong's true net trade position.

Do it from the GDP figures and you get a net merchandise deficit of HK$338 billion over the last four quarters. Do it with the customs trade data by subtracting retained imports from domestic exports and you should get a figure close to this.

But, no, when you do it this second way, you get a net deficit of HK$964 billion and there is no way that adjustments for freight charges and insurance will bring the two together. Which of these two is correct?

The probable answer is that both of them are wrong and we don't really know by how much. We have muddied the water with the effluent of our money laundering and now we can't tell how deep it is.

In most ways this does not matter very much. Trade is what trade is and if there is no big tax implications here for our public purse, which there isn't, well, who cares? But it does mean we cannot rely fully on GDP figures that result from questionable trade data.

Oh, what tangled webs we weave when first we practice to deceive.