How Valuable Is China’s Value-Added IP Data?
We have long cautioned that China’s industrial production (IP) data are inappropriate for cross-border comparisons. China does not publish an index of IP, only an estimate of the value added by industry. Estimations of value-added IP always are fraught with error, but lately the margin of error has expanded as the government attempts to curb energy usage.
In September, China’s steel mills reported a drop in output, especially in Hebei, where smaller producers cluster. However, China’s steel association recently claimed that regional governments and producers may have manipulated their figures to show better compliance with Beijing’s energy efficiency targets. Two theories dominate: Local officials either cut off electrical supply to producers, who then used diesel generators to maintain production levels, or the officials just lied to appease Beijing but let the mills produce to keep their creditors content. Whichever story you fancy, anecdotal evidence suggests that production and energy consumption remained basically flat in September, despite official statistics showing m/m declines for both. We play along with this charade for our October forecast and call for a y/y slowdown in IP, but relatively flat steel and iron ore prices—not to mention the acceleration in the PMI data—suggest no slowdown at all. As an indicator of economic activity, China’s IP data may not be all that accurate. As a signal of Chinese policy intentions, though, it most certainly is, which is why IP is so useful in predicting the curves in China’s growth pattern.
We discuss this and other predictions for China’s October data in the latest China Monthly, available to clients.
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