China’s economic reality lies buried beneath a stream of meaningless data

Numbers are divorced from reality in most cases and too much should not be made out of them

PUBLISHED : Wednesday, 10 August, 2016, 5:50pm
UPDATED : Wednesday, 10 August, 2016, 10:58pm

China does not publish detailed figures about its capital flows ... ... net capital outflows amounted to US$123 billion in the first quarter, compared with US$504 billion in the second half last year.

Business, August 10

Seems like pretty detailed capital flow figures to me, except for one thing. They are wrong. The trouble is that there are actually too many figures floating about and a good many don’t have an anchor to reality.

The bible in these matters is the quarterly balance of payments figures published by the State Administration of Foreign Exchange.

It is the bible because it has two firm anchors. One is the monthly trade balance and the other is the movement of foreign reserves. No-one can push these two around much without soon being seen. There is wiggle room between them but not much.

For net capital flow you take non reserve movements under the financial account plus errors and omissions, which is capital flow that has gone untracked. You then take a four quarter running total of these two to knock out statistical noise that would otherwise make the resulting figures look like the record of a seismograph in an earthquake. The result is in the chart.

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In the four quarters to the end of June this year the mainland suffered a net capital outflow of, yes, wow, US$689 billion.

Actually, I think the wiggle room might give me an even greater figure. The data says that mainland tourists spent almost twice as much abroad per person over the last year as they did in 2013, the high mark of the mainland’s economic fortunes.

Money’s tight, times are hard, let’s max out the credit card.

Really? I don’t buy it. I would guess that up to half of this additional spending represents tourists stashing savings abroad as a safe haven. If so, we can add another US$100 billion to the capital outflow.

Similarly, a common ploy for surreptitiously taking money abroad is over-invoicing of imports. You just tell the foreign seller of these imports to stash the difference over the real price in an account abroad under your name.

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This is called money laundering. We in Hong Kong do it for mainland entities all the time. We thrive on it. It’s against the law but it’s perfectly safe as long as you do it in a big way and don’t step on the toes of anyone big. But do it in sums of less than a billion and you could go to jail for ten years.

Had there been a surge in this practise over the last two years, however, the economic data should have shown a rising unit value for imports at a time when you might expect this unit value to decline. This is, in fact, what the mainland’s trade data shows but not enough to pull out the trumpets.

I hear your objection to all of this analysis, however. It is that the mainland’s foreign reserves have held steady at just over US$3.2 trillion since the end of last year. Surely these reserves would have plummeted with record capital outflows, would they not?

Surely not. All it takes is a big trade surplus that stays abroad instead of being paid back into the mainland. This counts as capital outflow. The rest of the balance of payments can stay pretty much in balance then with foreign reserves unchanged and yet the net effect is a big outflow.

The mainland’s trade surplus at the moment is running at a record US$617 billion a year. And guess what. It stays abroad at the moment.

All technical, I know. But that’s the money trade and that’s how it works.