JUNE 5 On a recent afternoon, Chen Yanchun, an executive with Guangdong Guangye Asset Management, presided over a bizarre emporium. Mr Chen's wares included 112 cases of French wine, 300 finely crafted swords, 100 Chinese opera VCDs and more than 500 tonnes of thread. All had been purchased or produced by some of the 245 state-owned enterprises grouped under Guangdong Guangye. Unable to sell these products, the SOEs passed them on to their parent asset management company for display at China's 2002 Spring National Stockpiled Goods Fair, which was held last week in Foshan. They hoped that Mr Chen might be able to find buyers for them there. The French wine had been imported by China South Seas Petroleum United Services. Managers there were also the geniuses behind the Chinese opera VCDs, produced in a presumably ill-fated joint venture with an Anhui television studio. The swords had been manufactured in Henan and purchased by a state-owned property-turned-logistics company that reckoned it could unload them for 2,000 yuan (about HK$1,874) each. Two years later, they are on sale for just 200 yuan. The fair offered a rare glimpse at the amazing array of waste produced by China's state sector, and highlighted an overlooked factor in the economy. University of Pittsburgh economist Thomas Rawski recently estimated that China's cumulative gross domestic product grew no more than 11.4 per cent since 1997, compared with the official 34.5 per cent. Mr Rawski and other doubting Thomases point to the inconsistency between, for example, China's high GDP growth figures and falling energy consumption. They also allege outright statistical fraud by local government officials under pressure to meet Beijing growth and reform targets. Others, however, say one cannot use one official statistic (such as energy consumption) to disprove another (GDP). One might as well point to China's high GDP growth rates as evidence that its energy consumption data is off target. They add that any padding is at least partly balanced out by under-reporting in the services sector. But everyone agrees China's GDP includes a lot of waste. Inventories are a legitimate component of every country's GDP. In most cases they account for less than 0.5 per cent of GDP - a figure that fluctuates between positive and negative territory. In the 1990s, however, economists calculated China's inventories at about 5 per cent of GDP year after year. They did so by looking at two official statistics: reported figures for inventories' contribution to capital formation, and capital formation's contribution to GDP. In 1995, for example, changes in inventories accounted for 15 per cent of capital formation, which in turn accounted for 41 per cent of GDP. This implied that inventories accounted for 6 per cent of GDP. As these calculations were bandied about in the late 1990s, Beijing's estimate of inventories' contribution to capital formation began to taper off, from a high of 15 per cent in 1995 to minus 1.1 per cent in 2000. It is debatable whether this was another statistical fraud or a natural consequence of supposed three-year 'turn-around' of the state sector, ordered by Premier Zhu Rongji in March 1998. A glance through Guangdong Guangye's catalogue of the stockpiled goods accumulated by its 245 subsidiaries belies the latter, more optimistic explanation, for a significant number of them were warehoused in 1998 or later. Moreover, the accumulation of large stockpiles of goods has consequences that ripple through the rest of the economy. Many of the stockpiled goods on display at the Foshan fair were manufactured with bank loans that will never be repaid. Indeed, such goods are manifestations of the bad debt that threatens the viability of China's financial system. Stockpiled goods are so abundant that they have even become a kind of proxy currency. Consider the example of Guangdong Jianming Electronics, a privately owned enterprise from Shantou, which was attempting to unload stockpiles of pens, batteries and blenders. But none of the products had been manufactured by Jianming Electronics. 'They are compensation from our debtors,' said company representative Lin Wei. Jianming Electronics had received the products from debtors in lieu of cash payments. There is now a thriving arbitrage industry in which usually privately owned enterprises buy and resell excess stock from SOEs at large discounts to their original value, exacerbating deflation while finding the buyers who eluded the SOEs. Guan Jiucheng of the Foshan Xingmao Materials Trading Centre, which acts as a resale agent for SOEs from as far away as Chongqing, said: 'A lot of the companies we represent didn't have any sales channels. Many SOEs have this problem.' Foshan Xingmao has in its dusty corner of the exhibition hall thousands upon thousands of bags containing nuts, bolts, screws, nails and other widgets. Another section contained piles of microscopes, cables, industrial valves. As Mr Guan spoke a man rummaged through one of the bags. After he found a bolt to his liking, a clerk charged him a few fen for it and wrapped it up in a newspaper. No doubt Mr Guan was hoping for higher volume transactions.