One of the common pitfalls in offshore investment is inaccuracy of the information you use to analyze investments. This may be because you are investing in a third world country that does not keep the data you need. Or in can be because you are investing in a country like China where economic data is often faked. Investing when Chinese economic data is faked is a genuine concern as reported by Business Insider of Australia. They have published an article stating that Chinese officials admit to faking economic data.
Even a time of heightened uncertainty, there’s one thing a majority of markets agree upon: Chinese data is unreliable, particularly figures released by regional governments.
Making the case for market mistrust, a report from Xinhua, a state-run government news agency, released over the weekend stated that “several” local officials in China’s Northeast region admitted to faking economic data in recent years to show high rates of growth when the real numbers were much lower.
According to the China Daily website, citing Xinhua, several officials acknowledged they had significantly overstated data ranging from fiscal revenue and household income to GDP.
“If the past data had not been inflated, the current growth figures would not show such a precipitous fall,” one unnamed official told Xinhua, attempting to explain why growth rates across the region were now among the lowest in the country.
If investing when Chinese economic data is faked were not a serious issue for investors this would be funny! Regional officials were rewarded for falsifying information that made the Chinese economic miracle seem even more miraculous. Now, when the Chinese economy is going to Hades in a hand basket, officials “admit” that the “real” numbers were substantially lower. Thus, the argument goes, things are not really all that bad because the economy was already slow and this year it has not fallen all that much farther. Where does an investor look for accurate information? Is it wise to simply avoid Chinese stocks? How about the effect that China has on developing economies and the global economy in general?
When the Numbers Do Not Make Sense
In the run up to the dot com market crash famed investor Warren Buffet said that he had gotten out of every stock (including dot coms) that he did not understand. This is the most successful investor in the world who insists on understanding how a company makes money and how it will continue to make money before investing a single cent, not to mention a few billion dollars. To the extent that a Chinese stock trading as an ADR in the USA is affected by poor economic numbers it is time to sell. To the extent that the data is meaningless it is past time to sell. Chinese exports and imports are both falling. And some analysts are questioning the stability of China’s economy as reported by Bloomberg Business.
[VIDEO] Richard Haass, president at Council on Foreign Relations, discusses the stability of a Chinese economy in transition and question marks surrounding the Middle East. He speaks on “Bloomberg Surveillance.”
The issue of most concern for those who are invested in China is political stability. China has change dramatically since opening to the West in the Nixon era. The Chinese people are certainly aware that their government is a dictatorship. But, so long as prosperity continued people were willing to ignore the lack of freedom. The concern for the leadership is how to maintain control when the economy continues falter. At what point will political unrest become a major issue? Social instability in China would be a more serious concern than investing when Chinese economic data is faked.