Eric Sprott: Investment Outlook (May 10, 2013)

Eric Sprott: The Golden Answer To Chinese Import Data

Submitted by Eric Sprott, Etienne Bordeleau, and David Franklin of Sprott Group,

Manufacturing data in the last several months has suggested that economic growth around the world is slowing. However, China’s export growth surprised the market this week and unexpectedly accelerated in April, even as shipments to the U.S. and Europe fell. This has created a conundrum for analysts and market watchers. How can China be growing while the countries that purchase its exports are slowing? The numbers don’t add up.

Digging deeper into these figures, several analysts have come to the conclusion that the numbers are faulty. Bank of America Corp. and Mizuho Securities Co. analysts have gone so far to say the figures have been inflated by fake reports. An “astounding” 92.9 percent jump in exports to Hong Kong, the most in 18 years, raises questions on data quality, researcher IHS Inc. said. They even call some of the data ‘absurd’, suggesting that exporters are ‘faking orders’ to obtain export-tax rebates. These observations challenge the credibility of Chinese economic data once again.

It is has been suggested that China’s robust appetite for commodities from iron ore to crude oil show that Chinese domestic demand is healthy, alleviating concerns about a renewed slowdown. China’s recent surge in gold imports puts this ‘increase in domestic demand’ observation into question. Our analysis shows that trade statistics are biased by the large gold inflows the country has experienced over the past few years. Because gold imports are accounted for in the “import” numbers of the current account (instead of the capital account like other investments), they artificially inflate the total import numbers published in the Financial Press. We say “inflate” because gold, unlike other materials, is mostly used for investment purposes and as such should not qualify as an import of “goods and services”, which is used to measure real economic activity. Now that China is importing significant quantities of gold, trade flow numbers are becoming more distorted. (more)

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