China – Why Does Wall Street Buy Chinese Economic Data?
The objective of this Blog is to provide some insight and discussion of Chinese economic data. To start with, I think it is important to recognize that the Chinese government is largely an unchecked authoritarian power (unlike a democracy where leaders must periodically face the voters) with an immediate objective to stay in power (like all governments). Because the Chinese government cannot be thrown out of power by the vote of its citizens it can take liberties with public information for the purpose of directing behavior without the threat of serious reprisal.
For the most part, the Chinese government seeks to maintain domestic harmony so that the current social order remains intact. To do this, they must continuously generate economic growth in order to provide jobs for an endless flood of migrant workers from the rural inland to the industrial coastal cities. This requires investment and investment requires capital. Capital is attracted to economic growth. Therefore, the Chinese try to continuously provide evidence of economic growth through official government statistics.
This is where Wall Street comes in. Wall Street is interested in selling investments to its clients. China provides them with “official” statistics that document growth. Wall Street can then pitch the wonders Chinese securities based on official data. This is great for Wall Street because their main interest is to facilitate the sale of paper and generate commissions. Wall Street is happy to cite Chinese “official” statistics as an engine for optimism and growth. Investors do not like to buy during circumstances of deteriorating fundamentals. Because the Chinese can provide Wall Street with a perpetually positive economic outlook which translates into sales Wall Street is a perfect willing conspirator in the dissemination of “official” Chinese statistics to attract capital to spur Chinese employment growth.
This is not to say that there is not tremendous potential for the Chinese people to rise as a great economic power. With 1.3 billion people and a very low average standard of living there is significant potential for Chinese economic growth. I believe that China can become the worlds most significant economic power if it can develop adequate checks on the government’s desire to manipulate the economy to maintain political power. I think that accountability will arise when the Chinese government’s interference with economic activity eventually leads to insurmountable imbalances and crisis.