Lies, Damned Lies and Statistics
06 August, 2015
There is a quotation often attributed to Mark Twain that says there are three kinds of lies: lies, damned lies and statistics. Twain went on to say that "figures often beguile me", and when it comes to the economic data of Greece and China, I'd venture to say he's not alone.
Greece continued to feature in front page headlines during July; no mean feat given the commotion happening in China. In both China and Greece it was the integrity of information (or the lack thereof) that caused market uncertainty and volatility. Markets just didn't know what to make of what was happening in either country!
Political discussions between Greece and Europe continued throughout the month with optimistic but empty statements. The Greek share market stayed shut for five weeks and immediately sank when it reopened, reflecting the lack of credibility and trust in the Greek economy and its banking sector.
Meanwhile the Chinese share market's wild ride came to an abrupt halt and late in July it suffered its biggest one-day fall in eight years — 8.5% in one day, and then smaller falls in subsequent days. The Chinese market provided plenty of media fodder with stories of individuals who had quit their jobs to play the local share market, or borrowed to participate in what seemed to be a one-way bet. The main Chinese market indices have more than doubled over the last year. While the fun ride has stopped for now, the Chinese share market is still well ahead for the year and the frothy activity has made a positive contribution to China's GDP with banks, share brokers and financial firms enjoying good times.
Where does the Chinese share market go from here? It is impossible to know. Just as there was no logic for the market's huge spike, there was no real basis for the slump. The Chinese market is opaque and to a large extent is a state-run affair. The Chinese government has, through Chinese media, encouraged investors to join in the frenzy and have also participated in the market themselves through state-owned entities and funds. Similarly the government played a role after the market slumped, announcing new rules and directions for state-owned entities in order to minimise volatility and allow for an orderly market deflation.
The Chinese share market is hard to comprehend, but the Chinese economy is an even bigger head-scratcher. As a command economy, China's policy direction, pace and implementation are controlled by the Government. While the world watches China's economy with baited breath, it nevertheless struggles to believe the economic data that comes out of China. While we should have rejoiced at China's achievement of exactly 7% GDP growth for the third quarter (which makes everyone else's GDP look anaemic), the skeptics couldn't help thinking how convenient it was that the number precisely coincided with the Government's target, that at least part of it came from the wild share market, and that it was calculated and released in just two weeks even though the experts in the US Department of Statistics take a full six weeks to figure out their growth!
Even applying a generous pinch of salt, China's economic growth adds a lot of dollars to world GDP. A table from Market Minder provides some perspective:
Hypothetical Chinese Growth in US Dollars
|If China grew...||Global GDP would gain|
|7.0% (official target)||$726.6 billion|
|6.8% (IMF estimate)||$705.9 billion|
|6.5% (assuming share market slowdown)||$674.7 billion|
|6.0% (a bigger slowdown)||$622.8 billion|
|5.0% (just to be really conservative)||$519.0 billion|
Source: International Monetary Fund. Calculations based on IMF's estimate of China's 2014 GDP at $10.38 trillion.
As Market Minder noted, even assuming the worst, $US519 billion is big: "it's like two and a half Greeces. Or, if you prefer, it's the equivalent of the US growing about 3%. Would anyone sneeze at that?"