Archive | March, 2012

Companies encouraged to lie

18 Mar

In the third quarter of 2011 most of my friends and network of fellow capital market professionals were demur or outright negative about the prospects for the US economy in 2012.  They pointed to a slowdown in official claims data, PMIs, and housing data. I disagreed, even in the face of the occasional aggressive response. I even took bets (the loser paying for coffee!) against the notion that the US would be in recession sometime in 2011/12. I was even brazen enough to suggest to some that the Federal Reserve would increase its benchmark rate by the end of 2013 (I still think they will).

Why did I remain bullish in the face of official data? For three reasons:

  1. There is always a seasonal adjustment bias in official US economic data. Easter to Thanksgiving tends to be more negative, whilst Thanksgiving to Easter tends to be more positive.
  2. I simply don’t believe in the new normal, and have always maintained that the inventory cycle will kick in at some stage.
  3. MOST IMPORTANTLY – COMPANY RESULTS DID NOT POINT TO A RECESSION. Top line growth, cash flow generation, and margins were all robust. Corporate balance sheets were pretty healthy too. Such growth in revenues would feed the chain, and a more robust US recovery would eventually become evident in official data.

Company results are our greatest barometer. So with that in mind, I read with trepidation Li Yanping’s Bloomberg article on Friday 16 March  titled: “Chinese Companies Forced to Falsify Data, Government Says”. I’ve re-posted Li’s article beneath my content here.  It is nearly summed up in the following quote:

“Statistics officials in Hejin city in northern Shanxi province gave companies “seriously untrue”numbers to submit
for 2011, the Beijing-based National Bureau of Statistics said in a statement on its website dated March 12.”

Frightening… truly frightening.Unlike the US, where I can use bottom up data to verify or falsify official statistics, it appears one has less recourse when it comes to deciding what to do in China.

Officials are trying to clean this up. Naturally I applaud both the whistle-blowing, and serious attempts to highlight the issue and clean up the mess; it must have taken a lot of courage and belief.

However, as investors we must be aware that the process is going to lead to increased volatility of published data. As such one should expect increased unpredictability around economic releases.


Chinese Companies Forced to Falsify Data, Government Says (1)

2012-03-16 07:01:27.685 GMT

(Updates with government comment in fifth paragraph.)

By Bloomberg News

March 16 (Bloomberg) — China’s statistics bureau said local officials forced some hotels, coal miners and aluminum makers to report false numbers, highlighting flaws in data tracking the world’s second-largest economy.

Statistics officials in Hejin city in northern Shanxi province gave companies “seriously untrue” numbers to submit for 2011, the Beijing-based National Bureau of Statistics said in a statement on its website dated March 12.

Discrepancies between national and local numbers for gross domestic product indicate the task that remains for officials seeking to bolster confidence in the statistics system. So far, steps have included crackdowns on leaks of market-moving numbers and direct online reporting of data by companies to limit opportunities for provincial officials to massage the numbers.

“The national bureau is demonstrating its resolve in improving the nation’s data accuracy but it has a long way to go,” said Lu Ting, a Hong Kong-based economist at Bank of America Corp. In general, national-level data from the bureau is “more trustworthy” while local numbers “need a closer look.”

The bureau urged regions, departments and individuals to learn a lesson from the Hejin case, without commenting on the frequency of such incidents. It also urged statistics officials to not violate laws and regulations.

Numbers Don’t Add Up

Layers in the data collecting system have added to inaccuracies and discrepancies. In 2011, the 31 provincial-level governments reported a combined GDP of 51.8 trillion yuan ($8.2 trillion), 4.6 trillion yuan higher than the national figure calculated by the statistics bureau, the state-backed Economic Daily reported in February.

The bureau last month started using a unified system to directly collect output, retail sales and investment data from

700,000 companies, to boost accuracy and reduce manipulation, agency head Ma Jiantang said Feb. 14. Any tampering or falsification will be treated “seriously,” Ma said.

The NBS has notified the Hejin government of irregularities and the officials responsible are being “dealt with,”

according to the March 12 statement. In a separate release dated Feb. 21, the bureau said officials in Yongchuan district, Chongqing, had interfered in companies’ data reporting in November.

Last year, China jailed two officials for leaking classified economic data in its highest profile crackdown on selective disclosure linked to insider trading.

Secret Information

Wu Chaoming, a researcher with the People’s Bank of China was sentenced to six years in prison for willfully revealing secret information to 15 people in the securities industry, Li Zhongcheng, a state prosecutor said in October. Sun Zhen, a former secretary in the country’s statistics bureau, received five years on similar charges.

The government began public efforts to combat the challenge of leaks in April last year and in July brought forward the monthly release dates for some figures to reduce the chance of early disclosure. Some of those who disclosed information got “handsome” lecture fees for speaking to securities brokerages, while others traded stocks for profit, said Du Yongsheng, a spokesman for the National Administration for Protection of State Secrets.

For Related News and Information:

Most-read stories on China: MNI CHINA 1W <GO> Most-read China economy stories: TNI CHECO MOSTREAD BN <GO> For top economic news: TOP ECO <GO> For top China news: TOP CHINA <GO>

–Li Yanping. Editor: Paul Panckhurst, James Mayger.