Glenn Maguires Asia Sentry Dispatch

July 23, 2012

Standardised Market Moves (past 24 hours).

Ill have six of one and half-a-dozen of the other, please.

In the absence of any significant data points in Asia this morning, market chatter continued on whether or not China is manipulating the official growth figures (they are, and most probably more significantly than they did in 2008-09) whilst the Japanese Cabinet Office painted the picture of a more widespread global slowdown in their monthly economic report.

Six of one and half a dozen of the other.

There should be absolutely no doubt that the Chinese statistician has historically smoothed the quarterly growth figures, underreporting growth during booms and overstating growth during leaner times. This is broadly understood by most economic observers of the Chinese economy, who rely on a range of secondary or supply side indicators to gauge the true speed of the economy. These include electricity production, commodity stockpiles and freight distribution within the economy. The smoothing of the headline quarterly data was not really the issue. Emerging economies tend to have a greater volatility in their cycle, and this can be exacerbated by poor data collection and sampling. In the case of China, the trend has generally been accurately reported. We suspect that something more sinister is currently at play. Not only is the extent of the China downturn been underplayed in the headline growth figures, it appears that secondary indicators such as electricity production are now also being smoothed to disguise the extent of the actual growth undershoot, which we believe is particularly large, and disguise the increasingly divorced from reality headline growth figures. We have written more extensively about this in our weekly Asia Sentry Report which you can access here. Still, the official rhetoric is already making noises consistent with a bang-on forecast 7.5% year-average growth outturn for 2012. Surprise, surprise!

The 1-day change in an assets price is divided by its 30-day volatility to make changes comparable across asset class.

Monday, July 23, 2012.

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Sentry Dispatch: The High Frequency Letter of Asia Sentry Advisory.

Song Guoqing, PBoC Advisor, sees growth cooling to 7.4% in Q3. Though markets seem to have interpreted PBoC Advisor Song Guoqings comments that growth may moderate to 7.4% in Q3 as bearish, he has simply extended the H1 slowdown into the second half of the year. If Song is correct, growth only needs to be stronger than 6.9% in Q4 for the economy to hit Beijings 7.5% growth target. There is absolutely no shortage of pundits claiming that the Chinese economy bottomed in Q2 and will be recovering in the second half of 2012. Songs comments directly contradict the consensus benign view of the economy. What is even a bigger slap in the face for the consensus is the evidence that China is clearly massaging (that is the most charitable word we can come up with) the growth figures. If growth were not so desperately weak as it is at the moment, China would have no need to massage its growth numbers. As we outline in our weekly note, we believe the electricity production figures are most probably been massaged as well. There are numerous anecdotal reports of senior executives with access to the power grid data saying that power production was down 10% over the year to June. The official figures for electricity production have been reported as flat. Still, there are some figures the authorities cannot fudge; those of the nations that directly export to China particularly to its processing and assembling hubs that are the engine of its manufacturing sector. Here, we find that Taiwanese and South Korean exports have historically had a nice correlation with Chinese economic activity. The fact that exports from these two economies to China were negative in year-over growth terms in the second quarter suggests that even the electricity output data may have been aberrant in the second quarter. Without a doubt, the GDP and IP figures are very well wide of the mark at this time. Accurate supply side proxies confirm the Chinese economy has flat-lined.
50 150

25

75

0
Electricity Production YoY LHS South Korea Exports to China YoY RHS Taiwan Exports to China YoY RHS

-25 -75 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12
Source: Asia Sentry Advisory and Bloomberg.

Todays Conclusion: We believe the deceleration in the Chinese economy will continue into H2-2012 and consequently forecast a full year- growth rate for 2012 of 7.3%. True growth will be even lower.

Monday, July 23, 2012.

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Sentry Dispatch: The High Frequency Letter of Asia Sentry Advisory.

Asia Sentry Advisory Pty Ltd Suite 9, Level 40, Northpoint Tower 100 Miller Street, North Sydney, NSW, 2060, Australia. Ph: +61 2 9931 7820 Fx: +61 2 9931 6888 M: +61 401 548 820 www.asiasentry.com gbmaguire@bloomberg.net glenn@asiasentry.com

Asia Sentry Advisory Pty Ltd is a boutique economic consultancy established to meet the growing demands of clients seeking greater exposure to the most dynamic economic region in the post-crisis global economy, Asia. Asia Sentry Advisory marries keen judgment with a rigorous model-based approach and a deeply intuitive understanding of Asia that can only come from on-the-ground experience to deliver market out-performing analysis and forecasts.
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