China’s Reliable Rise

NEW YORK – As the global economy sputters, allegations that China’s economic data are unreliable have called into question its economic rise. But, if China’s official growth estimates are untrustworthy, why do world stock markets continue to respond to them?

Citing unnamed “corporate executives in China and Western economists,” The New York Times alleged in June that “there is evidence that local and provincial officials are falsifying economic statistics to disguise the true depth of [China’s] troubles,” thereby inflating a variety of economic indicators by 1-2 percentage points. Similarly, in August 2009, the Financial Times reported that the tally of GDP estimates provided by China’s 31 provincial and municipal governments for the first half of that year was roughly 10% higher than the figure released by the National Bureau of Statistics.

Nevertheless, when the NBS reported in July that annual GDP growth in the second quarter was 7.6%, financial markets staged a relief rally. Indeed, even though the growth rate was in line with estimates of economists polled by Reuters (7.6%) and Bloomberg (7.7%), the S&P 500 gained more than 2% in response to the official data. This reaction contradicts prevailing economic theory, which predicts that financial markets will respond only tepidly to announcements of “unreliable” official data.

To determine whether this event was indicative of a deeper pattern, Philip Hans Franses and I have studied how stock markets worldwide responded to preliminary estimates of quarterly GDP data from China (released first), the United States (released two weeks later), and Germany (released two weeks after that) in 2006-2009. We found that preliminary estimates from Germany and China significantly affected world stock markets on 10.4% and 12.5% of the release dates, respectively, while US estimates did so on 19.8% of the release dates.