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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.


Martians learning Chinese!

11 Jul

2010 in review

2 Jan

The stats helper monkeys at mulled over how this blog did in 2010, and here’s a high level summary of its overall blog health:

Healthy blog!

The Blog-Health-o-Meter™ reads Fresher than ever.

Crunchy numbers

Featured image

A Boeing 747-400 passenger jet can hold 416 passengers. This blog was viewed about 1,700 times in 2010. That’s about 4 full 747s.


In 2010, there were 36 new posts, growing the total archive of this blog to 59 posts. There were 25 pictures uploaded, taking up a total of 2mb. That’s about 2 pictures per month.

The busiest day of the year was December 14th with 119 views. The most popular post that day was Jonathan Raven.

Where did they come from?

The top referring sites in 2010 were,,,, and

Some visitors came searching, mostly for anthony bolton webcast, historical significance of a toy, vtech toys graph, indexamex:czh.x, and vtech hong kong annual report.

Attractions in 2010

These are the posts and pages that got the most views in 2010.


Jonathan Raven July 2009


Cotton prices are a bubble – all bubbles burst November 2010
3 comments and 1 Like on,


An Investment Guru in China November 2010


Chinese Entrepreneur Confidence Index April 2010


Building a Core China Portfolio – Part 2, The Shortlist August 2010

Cotton prices are a bubble – all bubbles burst

12 Nov

I couldn’t help but notice some economists point out that clothing was one of the reasons for the upside surprise in China’s October CPI figure (4.4% vs. 4% consensus, and 3.6% in September). I would expect continued policy responses in this inflationary environment, including the chance of price curbs in addition to the market’s expectations of increased bank RRR rate.

I want to take a step back in this article and talk about cotton. The price of cotton is above $1/lb for only the second time since the US civil war! In fact look at the Bloomberg chart below – the price of cotton futures have almost doubled since July! Why?

Well there are some long term secular trends at work here.

  • I can’t deny that cotton demand in both China and India has doubled since 1995 – the result of increased urbanization and GDP/capita.
  • Over the past few years the prices of other soft commodities, such as corn and soy have also increased. This is the result of (1) improved diets in emerging markets (corn feeds animals, and animal consumption rises as nations grow wealthier); (2) a growing world population; (3) reduced arable acreage; and (4) bio-diesel production. As the prices of corn and soy have increased, farmers are naturally compelled to replace cotton production with the likes of corn production, which reduces cotton supply.

However I can’t ignore that the price of cotton smells like a bubble. Just look above at the chart again. Then look below at the chart of the historical price of potash.

When the prices of corn and soy increase, it makes economic sense for farmers to apply more potash to increase their yields. As a consequence the price of potash similarly increases. Over the period highlighted, the price of crops and potash increased dramatically. Now I know hindsight is a wonderful thing, but the price of potash eventually came crashing down – history shows us that was a bubble. During the years before the recent economic crisis market participants were well aware of the long-term soft commodity cycle (which I explained above).   Yet some kind of over exuberance grasped the imagination of market participants. The cotton chart looks like the left hand side of this potash chart before the price tumbled.

In my opinion short-term drivers of the cotton market have been overplayed. It has led to an over exuberance in cotton futures, and created a bubble. I’m not the first person to posit that when things are good the market thinks they are better than they are, and when things are bad the market thinks they are worse than they are.

What are these short-term drivers?

  • Weakened USD, which I believe is more likely to strengthen in the medium-term. Why?
    • I am against the consensus and believe that QE2 was over done. I think there’s a chance that all USD600bn might not be used. Why? Corporate tax receipts are healthy and indicative of strong profits in the next quarter. Unemployment is a lagging indicator, and always stagnates at this stage of a recovery – what’s more recent data has been encouraging and revised up. Employment agencies are seeing growth in profits, especially in temporary work (which as a quasi-lead indicator). IMS data highlights the inventory cycle is close to an inflection point (which will be great for employment). When the market sees this the USD is sure to strengthen. Also consumer confidence indexes are forecasting a solid consumer Christmas.
  • Potential for prolonged Indian cotton export bans
  • Bad weather in China and Pakistan
    • This is clearly cannot be factored in as a long-term issue!
  • The weather and Indian story have lead to short-term purchases by mills not wanting to be left short.

So you see there’s a decreased supply in the short-term, a short-term increase in demand, and a short term FX issue.  This must have led to massive speculation pushing up the price of those cotton futures. It simply can’t be the case that these short term elements could double the price of an asset on a fundamental basis, especially considering the fact that the long-term drivers have been known for years.

Now, I can’t tell you how long the price will remain elevated, or whether it will go up another 10%, 25% or 50%. But what I will say is that this is a bubble, and bubbles always burst.

So on the one hand beware. And on the other hand, look for stocks that have been hit and see if they present a good entry point – for example clothes retailers or manufacturers.

Zai Jian

PS – I hope soon to return to writing about building a core China portfolio. All articles on the subject can be found here –


The Chinese Begin to Worry

12 May

We all know that the Chinese market has retreated 21% since its peak on 23 November 2009.  But here’s something interesting…the gap between A- Shares traded in Shanghai/Shenzhen, and H-Shares traded in Hong Kong is at its lowest level since December 2006.  The premium is currently about 6.27%.  At its height it was over 200%!

See the chart below taken from Bloomberg:

Let’s start with some definitions, courtesy of

What Does H-Shares Mean?
A share of a company incorporated in the Chinese mainland that is listed on the Hong Kong Stock Exchange or other foreign exchange. H-shares are still regulated by Chinese law, but they are denominated in Hong Kong dollars and trade the same as other equities on the Honk Kong exchange.

H-shares on the exchange are automatically included in the Hang Seng China Enterprise Index, provided that they maintain the Hong Kong exchange regulatory requirements.

H-shares are available for more than 90 Chinese companies, giving investors at least some access to most of the major economic sectors such as financials, industrials and utilities. In 2007, the Chinese government decided to allow mainland investors to invest in the Hong Kong exchange, which greatly increased the demand for H-shares, as mainland investors were previously forbidden from investing in the exchange. China still offers A-shares in many of the same companies, but only mainland residents can invest in them.”  You can see this entry in full at:

What does it mean?

Well I assume it means that domestic Chinese investors are increasingly focused on the likely impact on the market of tightening measures the Chinese Government has begun undertaking.

The Shanghai composite index is down 21% since its high on 23 November 2009, while the MSCI China index of Hong Kong shares is only down 10%

Don’t expect a rate hike

3 May

Over the weekend the PBoC raised the bank’s reserve requirement ratio (RRR) by 50bp.  This is likely to remove about RMB250b from the banks.  The question is, why make such a move?

A priori it makes no sense as the government controls the loan supply by setting targets – a target of RMB 7.5tn was set for 2010 for example.  In fact over the past few weeks both short-term rates and long-term yields have been heading south, the result of adequate supply and limited demand for credit.  In other words this RRR increase is not a tightening measure, but simply the equivalent of issuing in central bank bonds at a lower rate (i.e. the deposit rate for required reserves is 1.62%, while the 1 year bills are about 1.93%).  But we still haven’t directly answered the question as to why the RRR was raised.

Well, it looks like the PBoC’s move was intended to manage market expectations of an imminent rate rise.  In recent weeks hot money has flowed into China, and foreign currency in the country has been exchanged to RMB on the assumption that the currency would appreciate.  Such FX flows in combination with tightened demand for credit reduced rates at the near end of the curve.  By raising the RRR the PBoC is trying to support short-term rates, which means that the banks itself does not intend an imminent rate rise.

A number of my readers have commented that they would like a beginner’s explanation of some of the topics I cover in my blog.  There is a wonderful website called – a financial dictionary with tutorials and comprehensive articles.  This blog entry touches on topics including money supply, the impact of interest rates, foreign exchange.  Clicking on the link below will take you to a definition of the term “money supply”.  There are links on the page to related terms and related articles.