China's revised growth numbers: why the economists are dismayed

Despite a sharp market sell off across the globe, economists and strategists are cautioning investors against putting too much emphasis on yesterday's dismal numbers regarding Chinese growth.

Investors were spooked after Conference Board admitted a “calculation error” in their leading economic index (LEI) for China and revised its April gain of 1.7% to 0.3%, which would in effect render it the smallest gain in five months. The interpretation - or fear - amongst traders was that this could signal the start of a double dip for China, eventually leading the global economy into a second recession in as many years.

The FTSE100 plunged more than 3%, with the price of oil declining and miners taking the brunt of the losses. Meanwhile, the dollar and the yen advanced as investors looked for safe havens amidst a heavy trading session.

Unreliable data

However, a number of economists have gone out of their way to point out this particular 'leading indicator' is actually not a good gauge.  Ting Lu, an economist for Bank of American Merrill Lynch, said: 'In our view, the significance of this LEI is overstated. We suggest investors downplay this LEI which we believe is overly leveraged by the long-earned reputation of the New-York based Conference Board.'

He added: 'We believe this LEI relies too much on low-quality monthly numbers generated from year-to-date data. It actually has a very short history if they use the same set of data, but a much longer one is claimed. And, because their data series are short, seasonal adjustment should be taken with a grain of salt, in our view.'

The amount of emphasis put on Conference Board's China LEI also surprised Simon Ward, chief economist at Henderson. 'Historically, it's not been watched closely as it's a relatively recent indicator.  I know some people have doubts about how it's constructed or whether it's actually a useful forecast, so it was a surprise that it was part of a reason for weakness in Asia and across the globe.'

'I don't view this piece of evidence as anything to get particularly excited about. Besides, there are much more important indicators, such as the purchasing managers index (PMI), that people follow more widely.'

Chinese trends

Charlie Awdry, fund manager on the Gartmore China Opportunities fund, agrees with Ward that there are better indicators out there for China and believes investors ought to focus on trends rather than monthly numbers.

He said: 'Essentially the government is taking liquidity out of the economy and that will have an impact. We are seeing growth, but it is not as fast.

In addition to reduced lending for mortgages, Awdry notes a stronger currency is resulting in a tightening for exporters. he added: 'All of those things combined are making the environment deteriorate and you are starting to see indicators which show growth slow down from the very high levels seen in the first quarter.'