China Prices a ‘Smoothed Version of Reality’

China Prices a ‘Smoothed Version of Reality’


Feb. 14, 2014 7:03 a.m. ET

China’s economy faces many challenges. Rising prices aren’t one of them, at least according to official data.

Consumer prices in January were up 2.5% from a year earlier, matching December’s pace and within Beijing’s comfort zone. While such low inflation might normally make authorities feel safe opening the credit spigots, that’s unlikely to happen given the concern about the economy’s mounting debt load.

The number was lower than economists expected: The Lunar New Year holiday fell at the end of the month, and family gatherings and official parties often goose demand for food. Pork, especially, is a huge part of the inflation basket. But for the first time in a decade, prices for the other white meat fell in the run-up to the holiday, according to Capital Economics.

Pork aside, skepticism seems to be warranted when reading China’s inflation numbers. A paper published in January by economists Emi Nakamura, Jón Steinsson and Miao Liu of Columbia University suggests the country’s official inflation and growth data reflect a “smoothed version of reality.”

That’s not to say it’s totally wrong. The paper concurs with previous work that the general direction of the data is correct, but the peaks and troughs are more extreme than reported. It finds inflation in the late 1990s was lower than measured, and thus that real growth was higher. On the flip side, inflation in the 2005-07 period—often seen as the peak of China’s boom—was much higher than measured, and thus growth lower.

Political manipulation is one possible explanation, say the authors. Equally compelling, they say, is the simple difficulty of counting price changes in a fast-growing economy. As disposable incomes rise, consumers are constantly upgrading the quality of products they buy and venturing into new categories of goods.

The paper doesn’t examine the most contemporary data, but investors wouldn’t be crazy to think inflation is higher today than the official figures show. Tight labor markets are driving up wages, capital inflows from abroad are strong and money supply has grown faster than measured nominal GDP for several years. Property prices, not well-captured in inflation data, are rising sharply. Whatever the case, a true picture of China’s economy will be hard to find.


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: