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By Leland R. Miller and Craig Charney | The Wall Street Journal | October 24, 2013

Another day, another release of economic data in China—this time, Thursday’s HSBC purchasing manager’s index, where an uptick this month suggests improving business confidence. This will contribute to what many observers have described as increasingly positive economic news. But it’s a mistake to draw that conclusion from recent official data, which manage to present potentially misleading data misleadingly.

The consensus narrative is that a significant stimulus program implemented after June’s credit crunch has jumpstarted manufacturing and is now sparking an overall economic recovery. This theory appears at first to be supported by a handful of twitchy monthly data. Beijing recently announced an uptick in quarterly GDP growth, and both the HSBC and official PMI numbers have improved of late.

It’s little wonder that this outlook is so popular. China’s rulers benefit from the perception that the economy is growing, caught as they are between the embarrassing Bo Xilai corruption trial and a major upcoming leadership conference set to discuss controversial economic policy shifts. Outside the government, bullish observers get the turnaround they’ve been predicting. And bears can harp on Beijing’s backtracking on its reform promises and renewed reliance on government stimulus for short-term gains.

However, our own private survey shows that this Chinese growth story is wobbly at best. The problem is not just overt manipulation or poor methodology, but also a presentation that would mislead even if the data were technically accurate.

Our survey of China’s economy, touching over 2,000 firms in all industries and regions, finds that rather than recovering strongly in the third quarter, China muddled through yet another mild growth slowdown. Manufacturing and real-estate revenue gains slowed, while mining and transportation saw growth slump. Services and retail showed slight growth upticks after a poor second quarter.

In manufacturing, where market optimism prevails after several months of improvement in the PMIs, our data instead show a modest downturn in the proportion of firms with revenue gains. New order growth also slowed, both at home and abroad, and business confidence slipped. Weakening growth elsewhere, both upstream in mining and downstream in construction, confirmed this trend.

This weakness jibes with the fact that there is also little evidence of the major policy stimulus that many analysts believe ignited that rebound. Monetary stimulus programs in China, unlike elsewhere, are typically exercised via directed lending by banks. Yet bankers in our survey reported that the growth in available credit slowed last quarter, both nationally and within seven of our eight regions, while total loan growth was even more restrained.

The proportion of companies that said they had borrowed was also down for the sixth quarter in a row, while the rate of rejections grew at twice that of new loan applications. If there was a major policy stimulus program last quarter, neither bankers nor companies seemed to notice.

So what explains this significant divergence in the growth stories? First, the market continues to rely too much on sporadic and unstable monthly data. For example, in just a few months the private PMI has ostensibly flipped from showing outright contraction to a sharp recovery.

When tracked in a larger sample, over quarters instead of every four weeks when a few days’ delay in reporting can skew a sample completely, our data show slipping growth—in profits, revenues, wages, employment and prices. This is no disaster, but certainly not the powerful expansion suggested by the consensus narrative.

Second, the choice of reporting period is critical. Unlike most major economies, China reports key economic data in year-on-year terms, rather than sequential quarter-on-quarter growth. What happened in the previous quarter, therefore, is largely irrelevant to the result, since the base of comparison is what happened during the same quarter a year ago. This often leads—as it may this week—to seriously misleading conclusions.

In fact, the choice of reporting period was particularly important during the third quarter. In some cases the clash was sharp—for example, trends in manufacturing revenue in Shanghai, retail revenue in Guangdong, or wage inflation in Beijing all look very different depending on the choice of reporting period.

While our data show that manufacturing and real estate slowed quarter-on-quarter, both industries showed moderate, stable improvement from a year ago. This accords with Beijing’s latest GDP growth announcement, but it tells precious little about where the economy is headed now.

With the sensitive Bo Xilai corruption trial occupying much of the summer and November’s highly anticipated Third Plenum economic conference fast approaching, there are many reasons Beijing may have been motivated to report overly positive quarterly data. And even if China’s positive growth data are accurate as presented, they shouldn’t be taken at face value.

Mr. Miller is president and Mr. Charney is research director of China Beige Book International.

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