China has been widely accused of currency manipulation in its attempt to prop up the yuan. But, it is also becoming increasingly clear that China has been rigging its GDP numbers. China’s first quarter GDP numbers came out few weeks ago at 6.8%,  exactly the same as the quarter before (Q4 2017) and the quarter before that (Q3 2017). This was not the first time. Amidst a weaker environment in 2016, China’s numbers were quite strong for a nation that is losing steam and incurring increasing debt. Particularly odd was that the growth rate actually increased from 6.7% in Q3 to 6.8% in Q4 despite an apparently decelerating economy.

Last year, some of the provinces – Liaoning, Jilin and Heilongjiang confirmed long standing suspicions that some of its economic data, including fiscal revenue, was faked between 2011 and 2015. Why do provinces fake the numbers? Because, local officials depend largely on economic growth – the most important factor in their performance appraisals – to gain promotion.

Future Wealth’s View

Last week, we highlighted the risks of investing in emerging markets, specifically India. China’s dodgy practices related to currency manipulation and artificial GDP numbers poses another high risk for emerging market investors. One of the key requirements in researching a firm or a country is validity of data. We accept audited statements of companies as the bible in valuing the company. But, when key metrics like the GDP of a nation is questionable, it becomes very hard to figure out the investment value.

Of course, there are public companies from China which are listed on the NYSE and/or Nasdaq and as such have to file audited statements of the company’s P&L, Balance Sheet and Cash Flows. But, investing in a handful of these companies deprives the investor from overall growth of the Chinese market.

So, what is the real GDP growth rate of China? Economists say that if you use electricity use as a proxy for actual economic growth, GDP is between 1.2 percentage points and 3.1 percentage points lower than the official growth rate. This will put China GDP growth at 3.7 – 5.6 percent. Not very healthy for a country that claims to have target growth rate of 6.5 percent.

For emerging market investors, we refer to a similar disclaimer – one for Bitcoin – do you research before investing any cryptocurrency. The audience was repeatedly warned but the available research was largely ignored. In China’s case, research is being done but with falsified data. Which is worse?

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