Share on facebook
Share on twitter
Share on telegram
Share on whatsapp
Share on linkedin
Share on print
Share on email

Risk Watch: China’s Industrial Profits Fell, Not Rose, Between January to May

◎ Industrial profits had in fact fallen 6 percent year-on-year.

Data published by China’s National Bureau of Statistics (NBS) indicates that industrial profits in the period of January to May 2018 rose by 16.5 percent from the previous year. Western media outlets described the industrial profits as “steady” and “solid.”

We checked the NBS figures with those of the year before, and found that industrial profits had in fact fallen 6 percent year-on-year.

The big picture:
Official economic data for May reveals a weakening Chinese economy. Total retail sales of consumer goods grew only 3.1 percent from 2017, and cumulative growth from January to May was only 4.6 percent. In the January to May period, total investment in urban fixed assets increased 6.1 percent, down 2.5 percent from the previous year. Aggregate financing to the real economy in May fell 28.4 percent from a year earlier.

Meanwhile, the Trump administration is planning to impose up to $450 billion worth of tariffs on Chinese imports. The first wave of 25 percent tariffs on $34 billion of goods would go into effect on July 6. After the announcement of the tariffs on June 15 and June 18, the Shanghai Composite Index plummeted below the psychologically important 3,000 level. The RMB fell below the 6.6 per U.S. dollar mark on June 27.

Our take:
1. This is not the first time this year that newly released NBS data fails to tally with its data from just a year ago. And the Chinese Communist Party (CCP) has a long history of fabricating economic data; in early 2018, several provinces openly admitted that their GDP growth figures in recent years were fraudulent.

The CCP plays fast and loose with its official data because it knows that nobody fact checks them under normal circumstances. However, we sensed something amiss with the new data given China’s worsening economy and our understanding of CCP behavior and propaganda tactics. CCP propaganda is neutral or muted when the Party and country are strong and doing well, and signals “all’s well; nothing to look here” when the Party and country are doing poorly and facing a crisis. Put another way, the CCP would resort to as much fraudulent or unethical behavior as it can get away with to paper over the cracks in tough times.

With the latest industrial profits data, the CCP resorts to a looser definition of macroeconomic indicators to issue good growth figures instead of a decline. For instance, the NBS noted in this year’s statement on the data that “the scope of industrial enterprises above designated size changes every year,” resulting in “statistical differences from last year’s official figures.” To “ensure that this year’s data is comparable with the previous year’s,” however, the NBS kept the “same time frame and scope of enterprise statistics.” The definition of “industrial enterprises above designated size” has been unchanged since 2011 (enterprises with annual revenue from principal business over 20 million yuan). This is the first year that the NBS sought to “clarify” that how it defines industrial enterprises is perpetually in flux.

Here is a hypothetical and simplified example of how the NBS can abuse the new and looser definition of a key macroeconomics indicator to fudge economic data. Let’s say that only half of 10,000 companies meet the definition of “industrial enterprises above designated size” in a given year, a sign of a worsening economy. The NBS can choose to exclude the non-performing companies from its counting of “industrial enterprises above designated size” using the excuse of “ensuring that this year’s data is comparable with the previous year’s.” With the scope changed, poor economic performance would be transformed into “solid” profits.

It should be noted that if the NBS statement about it changing the scope of data collection every year is accurate, then all previous statistics it has issued is false.

2. In comparing the 2018 data with that from 2017, China is in a severe economic slump. Fiscal revenue growth has been supported by abnormal property sales. The real estate bubble looks set to peak this year, and it is unlikely that the bubble can expand indefinitely.

3. We believe that China’s property bubble is bursting, and the country is facing its “Minsky moment.” The CCP appears to have run out of options to deal with a full-blown trade war with America, and is presently “playing dumb” and relying on propaganda tactics to continue deceiving the Chinese people. As social problems mount, the CCP may not be able to keep up the charade for long.

Read more:
Sino-US Trade Conflict a Catalyst for Big Change in China

Search past entries by date
“The breadth of SinoInsider’s insights—from economics through the military to governance, all underpinned by unparalleled reporting on the people in charge—is stunning. In my over fifty years of in-depth reading on the PRC, unclassified and classified, SinoInsider is in a class all by itself.”
James Newman, Former U.S. Navy cryptologist
“Unique insights are available frequently from the reports of Sinoinsider.”
Michael Pillsbury, Senior Fellow for China Strategy, The Heritage Foundation
“Thank you for your information and analysis. Very useful.”
Prof. Ravni Thakur, University of Delhi, India
“SinoInsider’s research has helped me with investing in or getting out of Chinese companies.”
Charles Nelson, Managing Director, Murdock Capital Partners
“I value SinoInsider because of its always brilliant articles touching on, to name just a few, CCP history, current trends, and factional politics. Its concise and incisive analysis — absent the cliches that dominate China policy discussions in DC and U.S. corporate boardrooms — also represents a major contribution to the history of our era by clearly defining the threat the CCP poses to American peace and prosperity and global stability. I am grateful to SinoInsider — long may it thrive!”
Lee Smith, Author and journalist
“Your publication insights tremendously help us complete our regular analysis on in-depth issues of major importance. ”
Ms. Nicoleta Buracinschi, Embassy of Romania to the People’s Republic of China
"I’m a very happy, satisfied subscriber to your service and all the deep information it provides to increase our understanding. SinoInsider is profoundly helping to alter the public landscape when it comes to the PRC."
James Newman, Former U.S. Navy cryptologist
“Prof. Ming’s information about the Sino-U.S. trade war is invaluable for us in Taiwan’s technology industry. Our company basically acted on Prof. Ming’s predictions and enlarged our scale and enriched our product lines. That allowed us to deal capably with larger orders from China in 2019. ”
Mr. Chiu, Realtek R&D Center
“I am following China’s growing involvement in the Middle East, seeking to gain a better understanding of China itself and the impact of domestic constraints on its foreign policy. I have found SinoInsider quite helpful in expanding my knowledge and enriching my understanding of the issues at stake.”
Ehud Yaari, Lafer International Fellow, The Washington Institute
“SinoInsider’s research on the CCP examines every detail in great depth and is a very valuable reference. Foreign researchers will find SinoInsider’s research helpful in understanding what is really going on with the CCP and China. ”
Baterdene, Researcher, The National Institute for Security Studies (Mongolian)
“The forecasts of Prof. Chu-cheng Ming and the SinoInsider team are an invaluable resource in guiding our news reporting direction and anticipating the next moves of the Chinese and Hong Kong governments.”
Chan Miu-ling, Radio Television Hong Kong China Team Deputy Leader
“SinoInsider always publishes interesting and provocative work on Chinese elite politics. It is very worthwhile to follow the work of SinoInsider to get their take on factional struggles in particular.”
Lee Jones, Reader in International Politics, Queen Mary University of London
“[SinoInsider has] been very useful in my class on American foreign policy because it contradicts the widely accepted argument that the U.S. should work cooperatively with China. And the whole point of the course is to expose students to conflicting approaches to contemporary major problems.”
Roy Licklider, Adjunct Professor of Political Science, Columbia University
“As a China-based journalist, SinoInsider is to me a very reliable source of information to understand deeply how the CCP works and learn more about the factional struggle and challenges that Xi Jinping may face. ”
Sebastien Ricci, AFP correspondent for China & Mongolia
“SinoInsider offers an interesting perspective on the Sino-U.S. trade war and North Korea. Their predictions are often accurate, which is definitely very helpful.”
Sebastien Ricci, AFP correspondent for China & Mongolia
“I have found SinoInsider to provide much greater depth and breadth of coverage with regard to developments in China. The subtlety of the descriptions of China's policy/political processes is absent from traditional media channels.”
John Lipsky, Peter G. Peterson Distinguished Scholar, Kissinger Center for Global Affairs
“My teaching at Cambridge and policy analysis for the UK audience have been informed by insights from your analyzes. ”
Dr Kun-Chin Lin, University Lecturer in Politics,
Deputy Director of the Centre for Geopolitics, Cambridge University
" SinoInsider's in-depth and nuanced analysis of Party dynamics is an excellent template to train future Sinologists with a clear understanding that what happens in the Party matters."
Stephen Nagy, Senior Associate Professor, International Christian University
“ I find Sinoinsider particularly helpful in instructing students about the complexities of Chinese politics and what elite competition means for the future of the US-China relationship.”
Howard Sanborn, Professor, Virginia Military Institute
“SinoInsider has been one of my most useful (and enjoyable) resources”
James Newman, Former U.S. Navy cryptologist
“Professor Ming and his team’s analyses of current affairs are very far-sighted and directionally accurate. In the present media environment where it is harder to distinguish between real and fake information, SinoInsider’s professional perspectives are much needed to make sense of a perilous and unpredictable world. ”
Liu Cheng-chuan, Professor Emeritus, National Chiayi University