Are China's national accounts accurate, or is it manufacturing GDP statistics in order to support the idea that it is floating above the global recession? The latter is admittedly the most extreme answer to the questions that credible sources are raising concerning the legitimacy of China's GDP data. Whatever the explanation, these questions have troubling implications for U.S. investors.

In its Oil Market Report of May 14, the International Energy Agency noted that China's reported growth in real GDP for the first quarter -- 6.1% -- is inconsistent with its demand for electricity and oil during the same period, with the latter declining 3.5% year over year.

Your sums don't add up
Yesterday, the Financial Times pointed out that summing the first-half GDP numbers from China's 31 provinces and municipalities produces an aggregate that is 10% higher than the national GDP figure published by the central government, raising fresh doubts about the quality of China's statistical apparatus.

The conundrum of Chinese GDP could ultimately have consequences beyond Chinese stocks (some of which have enjoyed spectacular returns this year -- see the table below) or even companies that are active in China, such as Coca-Cola (NYSE:KO), General Electric (NYSE:GE), or Procter & Gamble (NYSE:PG).


Year-to-Date % Return

Price-to-Earnings Ratio*




Suntech Power (NYSE:STP)



Shanda Interactive (NASDAQ:SNDA)



American Oriental Bioengineering (NYSE:AOB)



*Based on next fiscal year's earnings per share.
Source: Capital IQ, a division of Standard & Poor's.

Don't rock the boat
As I noted on Monday, U.S. stocks are currently overvalued; indeed, the market appears to be pricing a robust recovery with certainty -- something that is anything but certain. Current valuations will not tolerate much perturbation in sentiment if they are to remain at this level; a wholesale revision of expectations of China's short and medium-term growth would certainly be enough to upset the U.S. market.

The lesson for investors
Investors are warned: If you own U.S. stock indexes, make sure you're comfortable with the level of your exposure. If you're invested in individual stocks, keep an eye on their valuations. Finally, you should definitely have exposure to international stock markets -- although China isn't my first choice right now.

Global Gains co-advisor Tim Hanson won't overpay for growth, and he explains why he'll make money in China.