China data puts economists to the Rorschach test

August 14, 2014

By John Foley 

The author is a Reuters Breakingviews columnist.  The opinions expressed are his own.

Is China’s economy stable or stuttering? Swings in credit and investment reflected in data released on Aug. 13 support conflicting views. Broadly, things look on track. But uncertainty can be damaging if it undermines the confidence of the people who matter most: consumers and depositors.

In the financial system, mixed messages are coming thick and fast. July was the worst month for new loans since 2009. That sounds disastrous. Yet while total financing from January to July is flat year on year, it is up 21 percent over the past two months. That makes it possible to argue either that the central bank is keeping a lid on credit, or that it is encouraging borrowing to expand.

A rare statement from the central bank affirming that the decline is no cause for alarm merely adds to the impression that China’s economy is becoming like a Rorschach test – the ink blots used to test psychological perceptions. The message reassures, but the fact that the People’s Bank of China broke its habit of keeping mum suggests strain. Similarly, the 2 trillion yuan ($325 billion) in deposits that flowed out of banks in July could be a sign of financial strain, or just evidence lenders were window-dressing their balance sheets in the previous month. Investors and economists can take their pick.

In the real economy too, fact-finding can merely confirm prejudices. Almost every important indicator slowed from June to July, including retail sales, industrial output and fixed investment. But it’s equally easy to paint a more encouraging picture. Investment in some things that China can definitely use more of – railways, water treatment and environmental infrastructure – grew rapidly. Those that are falling or decelerating, like mining, real estate and heavy industry, are probably expendable.

It doesn’t really matter what economists think. But consumers and depositors are important. There the picture looks less fuzzy. Housing sales fell 17.9 percent year on year. The central bank’s quarterly confidence indices suggest people’s feelings about future income are the worst they have been in over a decade. Expectations are the most important part of the economy, and the hardest to manage. When China’s citizens are worried, there’s room for concern.

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