Data Leaks in China Give Some Investors an Edge

On Apr. 14, Hong Kong broadcaster Phoenix Satellite Television posted on its website China's March inflation rate, industrial output, and eight other key economic indicators, citing an unidentified source. When the official numbers were released that afternoon and the following day, 9 of the 10 figures posted by Phoenix turned out to be correct. Similar leaks of Chinese economic data have frequently circulated in recent months. "More often than not, we see the stock markets move strangely before the release of statistics," says Yan Yiming, a Shanghai-based securities lawyer.

Chinese authorities suspect that the leaks come from officials at various ministries and agencies that enjoy early access to the data. Now the National Bureau of Statistics of China is calling for a crackdown. "Those spreading state secrets on the Internet or other public information networks should be held accountable," bureau spokesman Sheng Laiyun told reporters in Beijing on Apr. 15.

To help plug leaks, the agency recently limited the number of people with access to data. The bureau says it has shortened the time lag between finalization and release of the consumer price index to 48 hours from 72 hours, and Sheng says the bureau may further reduce the lag on publication of that and other statistical data. The agency is seeking to "improve and standardize the process of information release to make the system more fair, open, and just," Sheng said at the briefing.

The advantage gained by investors who get a jump on the statistics can be significant, especially as China's markets grow in importance. Prior to last June's official data release, Reuters reported figures for consumer prices, exports, and new loans that exceeded analyst forecasts. The report, citing an unidentified government official at an investor conference, spurred the biggest gain in the Shanghai Composite Index in two weeks and set off a stock rally in Europe and the U.S. Figures later released by the government matched or were close to the numbers cited in the news report. "Those with early access can make money," says Lu Ting, a Hong Kong-based economist at Bank of America Merrill Lynch (BAC). Leaks are "an enormously important issue."

China's market watchdog doesn't investigate price movements related to leaked economic indicators, according to a senior official with the China Securities Regulatory Commission who declined to be identified. Insider-trading rules apply only to those benefiting from company-specific information, he says. A rule implemented by the government a year ago, though, made any unauthorized release of economic data punishable by a warning, demotion, or firing. The statistics bureau wouldn't say whether anyone has been sanctioned under the measure.

Economic data must be shared in advance with at least 10 government departments to "listen to their views and allow everybody to be prepared," says He Keng, a former deputy head of the National Bureau of Statistics and now a member of its consulting committee. They include the Ministry of Commerce; the National Development and Reform Commission, China's top economic planner; and the People's Bank of China, he says. Those organizations didn't respond to faxed questions. "The statistics bureau does have problems with other departments," says He. "How are we able to control it?"

Other countries are also grappling with leaks of economic statistics. Germany's labor agency last year reduced the number of people involved in compiling unemployment figures to stop data regularly appearing in the news ahead of the official publication time. In 2008, Britain's Office for National Statistics started disclosing certain official data to some government officials just 24 hours before publication, down from 40.5 hours previously. In the U.S., willful disclosure of protected data, including economic statistics, is a felony punishable by as much as five years in prison and a $250,000 fine. While some traders suspect leaks may have occurred, officials at the U.S. Commerce and Labor Departments couldn't recall any incidents in recent years.

Shi Yu, an investment manager for Chinese property developer Nanjing 21st Century Investment Group, looks for rumors in the days preceding the release of economic statistics. In February, Shi read on an Internet chat forum that China's January inflation would be a lower-than-forecast 4.9 percent, a prediction that turned out to be correct. The next trading day, the benchmark Shanghai Composite Index rose 2.5 percent, the most in two months, helping Shi realize a 2 percent gain when he sold shares of mining and metal companies. "In China it's better to be prepared than to be surprised," says Shi. "There is a window for speculation."

The April release marked the fifth time in six months that an accurate consumer price index number was reported in the media before its official publication. That figure has become one of the most sought-after numbers because of China's battle to curb inflation, which jumped to a 32-month high of 5.4 percent in March. Higher inflation means China is more likely to raise interest rates in an attempt to put the brakes on economic growth. "People tend to get a little bit nervous about high interest rates in China," says Sean Callow, a currency strategist at Westpac Banking in Sydney.

The bottom line: After leaks of economic data moved markets, China's statistical agency cut the number of people with early access to the figures.

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