Data Leaks Outside the Wall

Divulgence of China’s macroeconomic data has created a chain of huge profits.

When the National Bureau of Statistics (NBS) issued the macroeconomic data for May on June 14th, people unsurprisingly found that the Consumer Price Index (CPI) and other indexes were the same as the figures reported before by the media and securities institutions.

In May, China’s CPI increased by 5.5% from the previous year. It was the highest it has been over the past 34 months. It is only 0.1 percent different from the reported 5.4% which was published by Reuter on June 8th and had exactly the same “forecast” as Bloomberg.

Actually, this is not the first time the media and securities institutions correctly “guessed” China’s macroeconomic data. The foreign media represented by Reuter nearly became “Paul the Octopus” of China’s economic data. Before this June, Reuter had already correctly “guessed” China’s monthly CPI seven times since 2008.

China's macroeconomic data was frequently forecasted by foreign media, which makes people doubt the NBS’ authority and ability to keep a secret. For the institutions and experts who receive the data in advance, selling it may bring them a huge amount of profits. Preventing the economic data from being divulged has become an important task for the Chinese government.

“Crystal Ball” of Forecasting Data

Various information and reports from the past two years shows that the divulgence of China’s macroeconomic data has become a standard practice.

A classic case occurred this February. At that time, People’s Bank of China (central bank) declared the decision to raise the interest rate on February 8. Experts thought it might be because the CPI increased in January by over 5%, forcing the central bank to increase the interest rate. However, on February 14th, two columnists from Reuters said that the CPI in January had a 4.9% year-on-year increase and a 0.9% month-on-month increase, lower than the market expectation. When the data was published on February 15th, people found that the CPI had indeed increased by 4.9%.

There was also a previous case which occurred in 2008. On April 1st, 2008, Reuter quoted a “close source of government”, saying that the growth rate of the CPI in March was 8.3%, which was exactly same as the official data issued one week later. On May 9th, 2008, the “close source of government” told Reuter that China’s CPI could increase by 8.5% in April. It hit it when the official data was published several days later. In June 2008, Reuter once again made a correct guess regarding the CPI growth rate for May. That July, Reuter said that China’s CPI increased by 7.9% in the first half of 2008, earlier than the official publication of the same figure. On June 9th, 2010, Reuter reported, “China’s CPI had a 3.1% year-on-year increase in May,” which proved to be right later on.

Apart from Reuter, several media outlets from Hong Kong also reported this April that “China’s CPI would increase by 5.3% to 5.4% in March, the newly-lent loans in RMB amounted to 680 billion yuan and M2 had a 16.6% year-on-year increase.” These figures were exactly the same as the official statistics.

Some Chinese securities institutions also showed their potential to be “prophets” in guessing China’s economic data. At the beginning of this January, Citic Securities published its monthly report, saying the fast growing non-food price will make the CPI for December 2010 increase by 4.5%. China International Capital Corp. forecasted the CPI of food decreased by 0.1% in December 2010 and the non-food CPI continued to increase, so the CPI could increase by 4.5%. Then, On January 20th, the NBS published the data, showing that the CPI for December 2010 increased by 4.6%, exactly the same as the forecast of the two said securities institutions.

The Undercover “Mole”

Like other countries, China's economic data is sent to relevant government departments and experts before they are officially published. Apart from the production link, the departments and individuals that know the data before its published could be the gossipmonger.

As examined, during the data production process, workers in key economic research departments can get ahold of the data easily. For example, the Research Institution of People’s Bank of China is responsible for analyzing and forecasting the dynamic economic growth based on monetary polices, formulating and improving financial laws, studying the influence of credit loans, interest rate, and exchange rate on different industries in China. There is a subdivision of this institution which is exclusively responsible for the Capital Goods Price Index (CGPI). The workers of this subdivision can familiarize themselves with the data earlier than other people.

In addition, securities dealers can obtain economic data in advance because they have a close relationship with some government officials. It is common for some securities institutions invite government officials to take positions such as honorary chairmen or others roles of their companies. Many securities institutions’ chief economists also serve for a government department.

On June 14th, Sheng Laiyun, spokesman for the NBS, said that several secretaries for the administration office of NBS were under judicial investigation due to suspicions of divulgence. It is also reported that a secretary and a vice researcher for the Research Institution of People’s Bank of China were arrested this March because they were suspected of receiving benefits for divulging macroeconomic data. Even insiders of the National Development and Reform Commission, the most important economic decision-making department in China, are involved as well. It seems that a storm is coming soon.

It is said that the backstage operators of a series of macroeconomic data disclosures are solely these Chinese securities institutions. They usually acquire the economic data from those “secret tellers” hidden in the government departments through intermediate agencies.

Unbreakable Profit Chain

CPI, PPI and other macroeconomic indexes have great influence upon the prices of financial products, especially in the securities market and foreign exchange market. Therefore, knowing the data in advance is an important tool for the investors to arbitrate. The investment banks and securities dealers can take actions before the publication of data. Thus they can make use of the difference between the data and the market expectation to earn huge profits and transfer market risks to other investors.

Zhao Xijun, deputy dean of the Financial and Economic School of People’s University says: “CPI is closely related with the capital market, especially the bond yield. Therefore, those who are engaged in bond dealing and research are paying close attention to this figure. If they can know the data in advance, they can change their market deployment to earn more profits or avoid risk. That’s why many institutions and individuals are desperate to get the data in advance regardless of the cost.”

A source close to the fund industry, says that the securities dealers and researchers can directly benefit from getting the economic data in advance. If a research report of a securities dealer contains an accurate forecast of economic data, their funds can raise more capital and the relevant researchers can receive huge awards.

On April 14th, after the media in Hong Kong disclosed China’s economic data in advance, the global financial market was confronted with a series of chain reactions. On the same day, Reuter published a piece of news, saying,  "The U.S. Dollar Index dropped to the lowest point in 16 months," and China’s economic data, which was disclosed in advance, was a little better than experts’ expectations, pushing the exchange rate between Euro and U.S dollar to one Euro against 1.45 U.S. dollars.

In the Chinese domestic financial report, fluctuations will happen before and after the advance disclosure of macroeconomic data. Experts claim that if these institutions make use of this data for arbitrage, ordinary investors will suffer great losses.

According to Zhao Qingming, senior researcher from Construction Bank of China, the divulgence of macroeconomic data means huge profits when the virtual economy is highly developed and will result in an unfair market situation. He says the acquisition of said information advantages in illegal ways is no better than “public robbery”.

Some reports even point out that the well-informed source can know information regarding the CPI, newly-added loans, monetary policy changes and 4-trillion-yuan economic stimulus package earlier than ordinary people.

The root of frequent divulgence of economic data and important policies lies in the deterioration of the economic and financial ecosystem. From government departments to financial institutions, from the economic circle to the media, the divulgence of economic data has become a complete profit chain, which could bring numerous gains.

Faint Data-related Anti-corruption

Financial reviewer Ye Tan says that data-related anti-corruption should be considered as an important part of China’s anti-corruption activities if the government wants to put an end to the divulgence of economic data. In the U.S., all important economic data is released to the media at the same time and the media is required to publish it within a set period. The media cannot disclose the data in advance because the related persons’ communication tools will be taken away. People serving the government departments dare not violate the laws to disclose the information in advance. In Ye Tan’s opinion, data-related anti-corruption is dependent on supervision and penalties.

Meanwhile, shortening the chain of data transfer can lower the possibility of data divulgence. In recent years, Germany and Great Britain adopted this measure. For example, the UK Office for National Statistics reduced the time of reporting economic data to some government officials from 40.5 hours to 24 hours in 2008.

Zhao Qingming says that the Chinese government should follow suit and reduce the time and procedures for the data collection, production and publication. This is necessary for reducing the divulgence of economic data.

On April 15th, Sheng Laiyun, spokesman for NBS, was blamed for the divulgence of economic data. He says that the NBS will reduce the time from data production to publication to lower the risk of data disclosure. It is reported the amount of time it takes from producing the data for the CPI to publishing it has been reduced from 72 hours to 48 hours and further reduction is possible as well.

Nevertheless, the most important part is the punishment for those who participate in divulgence activities. Every time economic data is disclosed, the government only “severely criticizes those activities” without making an real investigations or punishing any officials engaged in the divulgence. Now, some minor participants of divulgence were arrested, hinting that the government seems to be handling this matter with more force. However, it is as ineffective as before.

The Criminal Law of China stipulates that the government officials should be sentenced to at most 3-years jail time if they divulge the national secrets with or without purpose. If the divulgence causes great damages or loss to the country, they will be sentenced to 3-7 year imprisonment. However, this stipulation is not well implemented in the financial sector. When confronted with the attractive notion of multi-million U.S. dollars in profits, a lot of people dare to disclose economic data because the punishment is too small.