Data twist reflect a changing China

SHANGHAI: China raised eyebrows last week by tweaking key inflation gauges just as it seeks to stem public anger about prices, but analysts said the revisions were necessary and not a bid to cook the books.

The government adjusted the consumer price index and its national survey of property prices both of which have become monthly sources of anxiety to worried consumers and to markets sensitive to policy changes.

But economists said the revisions reflect the evolution of the Chinese economy and consumer buying power, and are a step towards improving statistical accuracy in the world's second-largest economy.

"If you're pursuing the story that there's something to this adjustment other than a routine adjustment based on changing consumption patterns, I don't see any evidence to support that," said Andy Rothman, a Shanghai-based economist with CLSA.

Concern over the veracity of official Chinese figures is not new.

In the worst days of China's state-planned economy, officials routinely passed on fictitious statistics to appease their superiors. While experts say the situation has improved, questions over transparency continue to be raised.

Even Vice Premier Li Keqiang, who is expected to take over as premier within two years, described economic growth figures as "man-made" in 2007, according to a US diplomatic cable leaked recently by whistleblower website WikiLeaks.

Li has also pressed for sharper data from the National Statistics Bureau (NBS), which makes major revisions every five years and was scheduled to do so this year.

The bureau reduced the weighting of food prices which have a history of sparking public unrest in the consumer price index, while increasing the weight for rents and other housing costs.

As a result, overall inflation came in at 4.9 percent for January.

A Dow Jones poll of 15 economists had forecast a 5.4 percent increase.

The government has raised interest rates three times in the last four months and taken other measures aimed at slowing galloping inflation, and the price data has become an increasing focus amid market fears of further monetary tightening steps.

But economists say the consumer price revision is in line with "Engle's Law" of 19th-century economist Ernst Engle, who said that as incomes rise, the proportion spent on food falls.

"This is a big trend for any country that is growing. The weight of the food will surely decline in a consumption basket," said Lu Ting, a Hong Kong-based China economist with Bank of America Merrill Lynch.

"It's always been a big problem for China's CPI basket in that the weight of rent is sometimes too low. Even after recent revisions it is still too low."

Rent accounts for about nine percent of the index, compared to 40 percent in the US CPI.

The NBS said the revision was undertaken to reflect "changes in China's social and economic development and in the consumption structure of urban and rural residents" and ensure the accuracy of the numbers.

But Hua Min, an economics professor at Shanghai's Fudan University, said applying Engel's Law to Chinese consumers was premature.

"For your average low-income worker, spending on food remains their major living expenditure," he said.

"They may find the rise in inflation released by the NBS does not match the feelings they get of spending a lot on food in real life."

But any gap between the old and new readings is too small to affect policy, he added.

The national property survey by the NBS and the National Development and Reform Commission, meanwhile, was revamped to focus only on price data for individual cities to prevent extreme changes in specific localities from distorting national data.

It also aims to improve the accuracy of the figures by drawing on data from real estate sales centres rather than surveying property agents and developers.

A Standard Chartered Bank analysis concluded the changes should have only a minor impact on government policies, which are focused on fighting inflation by reining in liquidity and curbing property speculation.

It dismissed accusations of political motivations to play down inflation but said the poor quality of Chinese rental price data meant the new consumer price index could fail to reflect inflation rises.

But as CLSA's Rothman says, statistics cannot perfectly mirror reality.

"You could have this same discussion about the CPI basket in every country because it's trying to be an average, but nobody is really average," he said.