Merrill Sees Flaws in `Not-So-Leading' China Indicator After Stocks Tumble

Bank of America-Merrill Lynch said it sees flaws in the leading index for China that was revised yesterday, sending stocks tumbling around the world.

The Conference Board’s index “relies too much on low- quality monthly numbers,” Hong Kong-based economist Lu Ting wrote in a note today, calling it a “not-so-leading” indicator.

The Conference Board fed concern that the global recovery is faltering by correcting the most recent figure, released this month, to show a smaller gain in the index in April. The New York-based research group is seeking to establish the credibility of the measure, introduced in May.

“We welcome on-going dialogue with the analytical community here on how to deal with Chinese data,” William Adams, a Beijing-based resident economist for the board, said by phone today. “We believe in our index and we stand by this,” he said.

After the correction, caused by a calculation error, the measure rose 0.3 percent, the smallest increase in five months. The Conference Board previously said the figure was 1.7 percent.

The index is based on data from the central bank and the statistics bureau relating to loans, raw-material supplies, export orders, floor-space starts, consumer expectations, and supplier deliveries.

Economist’s Concerns

The measure, published after four years of development, is designed to capture the outlook over the coming six months. It would have signaled China’s growth slowdown in 2008 and the recession of the late 1980s, Adams said previously.

Lu said he is concerned that data is of low quality, the composition of the index -- especially the inclusion of the measure of the speed of deliveries from suppliers -- is flawed, and seasonal adjustment may not be meaningful.

“Constructing leading indicators for China should always be encouraged, but seemingly sophisticated techniques, even if they have been proved useful somewhere else, can add little value if they use an inappropriate data set with low quality,” the Merrill economist said.

Brian Jackson, an emerging-markets strategist in Hong Kong at Royal Bank of Canada, said yesterday that while the Conference Board’s index is dated, as other data have already been released for May, it provides a “useful” composite of indicators for the nation’s economy.

China’s next economic release is a manufacturing index, due tomorrow, which is likely to show slower growth, according to a survey of economists by Bloomberg News. The Shanghai Composite Index of stocks fell 1.2 percent today to close at a 14-month low.

To contact the reporter on this story: Sophie Leung in Hong Kong at sleung59@bloomberg.net

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