Wednesday, May 6, 2009

Economic forecasts - Chinese vs Western style

China Analysis: China economic forecasts: go herbal or Western? - Wei Gu

Reuters' Wei Gu wrote a insightful op-ed in today's news. He proposes a clever analogy in the form of a question:

"Which would you believe when it comes to diagnosing the health of China's economy -- the pulse taking of the herbal doctor or the lab tests of Western medicine?

When it comes to economic forecasts, Chinese planners favor using such economic indicators as shipping indexes like the Baltic Dry Index or more concrete measures of economic activity such as domestic power output / consumption.

Western forecasts on the other side tend to be based on more "mainstream" economic data such as money supply, loan growth and fixed asset investment.

Wei Gu argues such measures may not be as useful as experts in the West believe at measuring a transitioning economy such as China.

Gu elaborates his point by explaining that China is heavily dependent on the rest of the world for energy, therefore if energy output in China is increasing, it has to be buying it from somewhere. Raw output and consumption data offers a means in which to back check the accuracy of the data released from the Chinese government.

Gu writes, "Its beauty is that it is not distorted by inventories, is difficult to manipulate and is available almost real-time. Chinese banks routinely check the utility bills of their clients to make sure that factories are still busy."

Shipping offers another insight into the Chinese economy. Developed economies are generally more focused on service industries rather than manufacturing and exports. This helps to explain why Western economists favor looking at money supply and fixed investments.

However, considering Western economists remain a powerful influence in the global economy, it is important to pay attention to their own observations and forecasts.

This year, as Gu explains, the Baltic Dry Index "offers a less telling read on China's demand for raw materials because the State Reserves Board has embarked on a commodities buying binge. Thus commodity imports might just be sitting in the reserves instead of going to factories.

After China's money supply surged a record 25.5 percent in March as banks ramped up lending, foreign investment banks' knee-jerk response was to upgrade their forecasts for China GDP."

Perhaps this is a sign that an economic recovery -- which has caught the imagination of economists and investors but has yet to convince Chinese leaders -- is on the way, but its actual start might be later than what the market believes."

Click here to access Wei Gu's complete article