Noah Smith on the Great Chinese Data Conspiracy

Noah Smith weighs in on one of my favorite topics, China’s GDP:

It’s very hard to fake economic numbers in the same direction for a very long time — eventually, it becomes obvious to everyone that your economy is either much bigger or much smaller than the cumulative growth rates would have indicated. Something a bit like this happened to China back in 2007, when the Asian Development Bank reported that China’s gross domestic product was much smaller than believed. Chinese inflation had been understated, leading to real (inflation-adjusted) growth numbers that had been too high for too long.

If you follow the link, you get this:

In a little-noticed mid-summer announcement, the Asian Development Bank presented official survey results indicating China’s economy is smaller and poorer than established estimates say. The announcement cited the first authoritative measure of China’s size using purchasing power parity methods. The results tell us that when the World Bank announces its expected PPP data revisions later this year, China’s economy will turn out to be 40 per cent smaller than previously stated.

.  .  .

Well-informed analysts know that PPP calculations are a poor measure of a country’s potential military base, but with the corrected China PPP statistics, the whole question is moot. China is just not that big now and will not get that big any time soon.

I guess the “biggest economy in the world” is “not that big” and “2014” is not “anytime soon”.  Why Noah Smith would link to an outdated 2007 World Bank re-evaluation of China’s PPP GDP, when there is a more recent 2014 re-evaluation by the very same World Bank, that went in exactly the opposite direction—claiming China’s GDP was much larger than previously believed, and indeed is now the largest in the world.

[And please let’s not have any commenters tell me it’s GDP at market exchange rates that matter, unless you also plan to claim that Abe has plunged Japan into one of the greatest depressions in all of world history, reducing GDP in dollar terms by 30%, while miraculously reducing the unemployment rate to 3.4% at the same time.  Is that your argument?  Or is your argument that in the past three years the US GDP has soared by 50% in yen terms, one of the great booms in all of world history?  Or is Chinese GDP measured in Venezuelan bolivars what really matters?]

And then there are the conspiracy theories:

The unreliability of Chinese official economic data has become almost a cliche. A few years before he became China’s premier, Li Keqiang said that the country’s numbers were “man-made” and “for reference only.” If the top economic policy maker of a country says that the numbers aren’t reliable … well, you believe him.

So China’s leader, the most powerful since Mao, is engaged in a vast conspiracy to convince the world that China is growing at 7%, while its number two man, the guy all the China experts say has been completely emasculated by Xi, is publicly trying to expose the conspiracy?  Is that how things work in China?  And wasn’t Li’s criticism aimed at the GDP number for Liaoning province, not China as a whole?  And isn’t it true that the statisticians who compute the national figures completely ignore the provincial estimates, because they don’t believe them?  And isn’t the national growth rate generally lower than the average of provincial growth rates?

The so-called Li Keqiang index focuses on heavy industry (which uses a disproportionate share of the electricity, and rail shipments) and thus is completely inappropriate for an economy rapidly switching from heavy industry to services.

Noah continues:

But I would like to suggest a scenario even more pessimistic than the lowest of the numbers above. After reading reports by Peking University professor Chris Balding on the state of China’s financial sector, I think there’s a possibility that China’s growth is lower even than 3 percent.

Chinese electricity usage is growing at more like 1 percent. Rail freight traffic, though volatile, has suffered some dizzying drops in recent months. These are traditional proxies for heavy industry output. That they are barely growing, if at all, implies that much of Chinese industry has ground to a halt.

I’m confused.  If heavy industry is only growing at about 1%, and EVERYONE seems to agree that heavy industry is doing far worse than the overall Chinese economy, then how is China’s overall GDP growth lower than 3%?

Right now the consensus forecast for Chinese growth is 6.8% this year and 6.5% next year.  When interviewed, these forecasters often say the actual numbers might be only 5% or 6% (which seems plausible to me), but not something like 2%.  I have no idea where Smith is getting these estimates.

In late October there were lots of scary stories like this one:

Alibaba results to dim outlook for China consumer spending

So much for consumer spending, right?  Excepts those stories were about what was expected, the press pretty much ignored the actual figures:

Two of the world’s biggest brands put in an impressive quarter in the Middle Kingdom.

Alibaba’s earnings report yesterday proves, again, that the Chinese consumer is doing just fine in a slowing economy. Thanks to those consumers, hope for something other than an economic crash isn’t misplaced in the world’s second-largest economy.

Alibaba said its quarterly revenue jumped by 32%; annual active buyers on its system rose to 386 million, up 20 million; gross market value, the dollar value of transactions, climbed by 28% to $112 billion; and earnings per share climbed by 30%.

Maybe most importantly for the company, Chinese smartphone users are buying a lot more stuff on their smartphones. Alibaba’s monetization rate, the commission rate that it charges sellers for every transaction, trended upward for the first time in five quarters, according to Jefferies Cynthia Meng in Hong Kong last night, thanks to mobile shoppers buying.

Alibaba could be an aberration. Maybe the low-priced goods popular on Taobao aren’t an indicator of consumer strength. Some corroboration of the trend from rivals JD.com JD 3.24% and Tencent Holdings Ltd TCEHY 2.27% , when they report, would certainly be welcome. But recent data show the same positive story for Chinese consumers.

Start with the most widespread luxury consumer brand in China, Apple. New iPhone 6s in mainland China sell for close to $1,000. Yesterday the Cupertino company said China sales increased 99% in its latest quarter, to $12.5 billion, from $6.3 billion. CEO Tim Cook was quoted yesterday saying if he avoided TV and online news and only studied Apple’s numbers, “I wouldn’t know there was any economic issue at all in China.”

Looking only at China’s consumer data, you might say the same thing. China’s third quarter GDP highlighted a thriving services sector, which grew by 8.4% in the third quarter as manufacturing slowed to 6%, and even negative in some provinces heavily reliant on industry. Retail sales in September, meanwhile, grew by 10.9% in nominal terms.

When you are selling $112 billion in a quarter, that’s about $450 billion a year.  That’s huge.  And when that number is rising at 28% year over year then sorry, I just don’t see a recession, or even 2% growth.

I see that Noah Smith relies on Chris Balding’s expertise on China.  He might want to check out this post, before doing so in the future.  Then read the Balding post I link to.  And then think about the fact that Balding wrote the post more than three years ago.  Here’s just a small sample from his post:

The Beijing government admits that 50% of apartments sit empty.  A similar number is found in most major cities in China, not to mention the entire cities that sit empty.  .  .

One recent article noted that the average price per square foot in Beijing was nearly $300 while monthly per capita GDP was only $435.  .  .  .

Living in China I can attest first hand to the fact that China has easily the highest price level of any country I have visited in the past two years.  .  .  .

Beijing isn’t concerned about the 2/3 of the population that still live as subsistence farmers in rural areas.  .  .  .

There is no Chinese economic liberalization story.  .  .  .

However, this year has not been a good year for the party.  Economic data that is now just blatantly made up, at least one coup attempt to begin the year, and a collapsing economy do not make ideal conditions to hand over power.

Outsiders do not realize how tense things are in China right now and bad business is.  In my local mall where police used to stroll by, large battalions of police troops are now regular guests.  Small tanks and rows of paddy wagons line the street under the Starbucks every night.

I was in Beijing when he wrote that blog post, and it doesn’t describe the China I saw, nor are the numbers accurate.  Not even close.


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26 Responses to “Noah Smith on the Great Chinese Data Conspiracy”

  1. Gravatar of Ray Lopez Ray Lopez
    22. November 2015 at 06:58

    What? Sumner rambling on and on and on….

    Sumner: PPP is not the relevant metric. You as an eCON-omist should know that PPP uses a “Gehry” unit of account (sic, from memory, and I’m not in your field) dollar that’s a proxy for a sort of ‘world dollar’, and, as such, it overstates developing country metrics.

    Simple example: Pizza Hut is a world corporation, originally from the USA (I think Pepsi still owns them). But a Pizza Hut in Manila does not serve the same quality pizza as a (superior) Pizza Hut in the USA (though it’s pretty close, and the Mall of Asia Pizza Hut is the best I’ve seen here in PH). Likewise Burger King Manila != (not equal) to USA version, McDos (McDonalds) etc. But for “PPP” purposes, and for the purposes of the Economist “Big Mac” index (same principle), they are equal.

    Hence PPP overstates Third World metrics.

    You should know this stuff, I’m not supposed to be teaching you.

  2. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    22. November 2015 at 07:26

    From Xavier Sala i Martin’s Global Competitiveness Report 2015-16, for the World Economic Forum

    http://www3.weforum.org/docs/gcr/2015-2016/Global_Competitiveness_Report_2015-2016.pdf

    —————-quote—————–
    First, as the Global Competitiveness Index (GCI) shows,
    China possesses strong economic foundations. The country
    ranks 28th out of 140 economies in the 2015–2016 edition.
    China has achieved near universal primary education and
    high levels of public health, invested massively in transport and energy infrastructure, and ensured a relatively stable macroeconomic environment. These successes not only have contributed to China’s emergence as a manufacturing hub, they also represent assets on which to build. China’s advantages are not shared by many neighboring economies at a similar stage of development….

    Second, an eventual slowdown was inevitable, predictable, and entirely normal, given China’s impressive growth trajectory over the past two decades. Figure 2 compares China’s annual real growth rate since 1980 to the
    GDP-weighted average growth rate of other countries in the
    income group to which it belonged in each year. Since 1991,
    China has grown faster than its peers every year. For several years in the 1990s, the differential was almost 10 percentage points. Since achieving upper-middle-income status in 2010, the differential has been around 5 percentage points.

    Third, even though it has not yet abandoned the official
    7 percent target, there are signs that the government has been preparing for the economy’s new phase and has been
    recalibrating its growth objectives from the quantitative to
    the qualitative. The 12th five-year plan, adopted in 2011
    and covering 2010–15, had called for a rebalancing of the
    economy; more recently, President Xi referred to a “new
    normal” under which growth will be lower.
    ————endquote————-

  3. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    22. November 2015 at 07:40

    Reading a little further in Sally Martin’s GCR;

    ‘The GCI[ndex] points to the structural weaknesses of China’s financial sector: it ranks 78th for the soundness of
    its banks, which have accumulated many non-performing
    loans. The sector is dominated by large state-owned banks,
    and credit flows more to state-owned enterprises or large
    corporations with connections than to small- and medium-
    sized enterprises: access to finance is rated as the second
    most problematic factor for doing business in China….’

  4. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    22. November 2015 at 07:47

    The above is followed by;

    ————quote—————
    A rank of 58th [out of 144] on goods market efficiency highlights the need to create a level playing field in non-strategic economic sectors by reforming state-owned enterprises and subjecting them to fair domestic and foreign competition, and by tackling corruption (China ranks 67th for incidence of bribery) and bureaucracy (123rd for the time it takes to start a new company).

    Moving beyond market efficiency, the list of the most
    problematic factors for doing business in China is topped
    by its lack of capacity to innovate, which has become a
    growing concern in recent years …. Evolving from a
    manufacturing-based economy to an innovation powerhouse
    for design and R&D requires a holistic approach to the
    innovation ecosystem, including nurturing talent (China ranks 68th in higher education and training) and technological readiness (ranking 74th; technology is still far from universally available, let alone used).

    The progress that China has already made in rebalancing its economy suggests its capacity to identify and rectify weaknesses in its growth model. Since 2005, the relative importance of manufacturing in China’s economy has been declining steadily, and services now account for a
    bigger share of GDP.

    Meanwhile, a fledgling social safety net consisting of a healthcare and pension system, along with rising incomes and lower exports, have initiated a rebalancing of demand toward domestic consumption. China’s “new normal” will bring further challenges in improving productivity, but its strong performance elsewhere in the GCI indicates that the country is well positioned to meet them.
    ———–endquote———–

  5. Gravatar of Brian McCarthy Brian McCarthy
    22. November 2015 at 07:50

    The GDP accuracy debate is a straw man. Who cares? The situation is ugly enough using the official stats, which show the industrial economy (where all the debt is) stagnating in nominal terms. Why you are not screaming “monetary policy error” is beyond me.

    As for the idea that the industrial economy can wither while “services and consumption take the baton,” I would urge you to get to Beijing for some one-on-one meetings with PboC, MoF, MoC, NDRC, think tanks etc. Having done so twice in the past three months myself, I can assure you that no one really believes the “switch to services” story, but is instead extremely concerned about the ramifications for employment and debt servicing, and therefor both social and economic instability, of the yet unaddressed problem of malinvestment and overcapacity. Maybe we can talk about them executing some “shift to services” AFTER they actually allow ONE bond to default or actually shut SOMETHING on the industrial side down? Fair?

    As for Balding being three years early, any recollection of what else happened three years ago? Does the term “QE infinity” ring a bell perhaps. Does it not occur to you that when an economy is running a credit bubble in the ponzi finance stage AND trying to maintain an FX peg that monetary policy in the counterpart currency zone is pretty important? Maybe has something to do with the sharp deterioration in China sentiment since, oh, about a year ago, when QE ended?

    As for Alibaba sales, in 2007 would the prospects of Apple, Google, and Amazon been your best leading indicators of the coming collapse?

  6. Gravatar of Ray Lopez Ray Lopez
    22. November 2015 at 07:58

    Further to second the excellent points made by Brian McCarthy, note that Sumner does not quote re electricity consumption this follow-on sentence by Noah Smith, which clinches his argument: “China bulls, of course, will argue that the country is merely in the middle of a transition from industry to services, and from wasteful power usage to greater efficiency. That is probably true. But the speed of the transition would have to be incredible to make up for the precipitate drop in industrial activity. Why would China’s service sector and energy efficiency suddenly skyrocket immediately following the bursting of a major stock bubble? ”

    Why indeed? Jumps and discontinuities are rare in nature (quantum physics notwithstanding, but at the macro level they are rare). Likely there is a demand shortfall in China that’s being covered up, unnoticed by Sumner who has his ostrich-head buried in the sand.

  7. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    22. November 2015 at 08:05

    In contrast, oil rich Venezuela (and one of Bernie Sanders’ favorite countries?) ranks 132nd in overall competitiveness. They’re just ahead of Mozambique and Haiti, but below Myanmar.

    Chile (35th) is the highest ranked Latin American country. Thank you, Augusto Pinochet.

  8. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    22. November 2015 at 08:11

    ‘I can assure you that no one really believes the “switch to services” story….’

    Did you mean, except for the economists who put together the WEF’s new report, from which I just provided this;

    ‘Since 2005, the relative importance of manufacturing in China’s economy has been declining steadily, and services now account for a bigger share of GDP.’

  9. Gravatar of Brian McCarthy Brian McCarthy
    22. November 2015 at 08:26

    Patrick Sullivan: yes, they state a stastical fact that supports the propaganda. Well done. Of course, the credit bubble has pumped up financial services (which are almost completely closed) and real estate service quite heartily. “Other services,” which account for over 20% of GDP are growing at 12.5% nominal, and I challenge you to tell me what that is comprised of. Meanwhile, the “retail and wholesale trade” component of services is now growing at <6% nominal.

    What I meant by "no one believes the switch to services story," is that no one believes that any such thing is possible at a 6.5% GDP growth rate, which the leadership has fully and publicly committed to for the next five years.

    Again, if some seamless transition from old economy to new is underway, please show me all the old economy activities they are shutting down, and all the credits they are allowing to fail instead of scrambling to roll them all over.

  10. Gravatar of Benjamin Cole Benjamin Cole
    22. November 2015 at 08:33

    A country in the Far East suffering from much slower growth is…Singapore.

    Cruise ship lines are spending literally billions of dollars to homebase new ships in China.

    I guess they do not have the insights of Balding.

  11. Gravatar of LC LC
    22. November 2015 at 08:55

    Scott:

    Bloomberg News’ items on China are schizophrenic. Just today, there’s is the awe section: last chance to get 680% return on Chinese IPO!. Fear: China is militarizing the SCS artificial islands. Then there is periodic panic: Chinese PMI indicates continued weakness in economy. Crash next year! The columnists are doing no better, with Balding now contributing occasionally, the piece by Noah you linked to, Edward Niedermeyer complaining about GM being ungrateful for bailout by importing SUVs from China and China didn’t lift a finger during GM’s crisis, to Adam Minter’s latest piece on ARJ-21 that didn’t even get facts right.

    It’s indicative of America’s schizophrenic relationship with China overall, with no real guiding principle or strategy.

  12. Gravatar of ssumner ssumner
    22. November 2015 at 09:16

    Ray, So Japan is in a deep depression, with GDP falling by 30%. Okay . . . .

    Brian, I have said China needs easier money, many times.

    You said:

    “As for Balding being three years early”

    My complaint is not that he’s three years early, it’s that his numbers are all wrong. How can a so-called China expert not even know the most basic facts about China? I don’t get it. Half the Beijing houses are empty? Two thirds of Chinese are subsistence farmers? Beijing per capita GDP is $430 a month? Beijing has a high cost of living? Where does he get this stuff?

    I do agree that China has lots of debt problems, no doubt about that.

    Good point about Alibaba, but it’s far bigger than Amazon was in 2007. In any case I’m not trying to predict with that data point, just understand what’s happening right now. People are saying that China’s in a deep recession—is it?

    You said:

    “Again, if some seamless transition from old economy to new is underway, please show me all the old economy activities they are shutting down,”

    I don’t get it. First the China bears say China needs more consumption and less heavy industry. Then when they start reducing heavy industry and boosting consumption they complain China’s going into a recession. But that’s what you called for, isn’t it? I would prefer that China allowed more outright defaults but apparently that’s not the way they do things.

  13. Gravatar of Pietro Poggi-Corradini Pietro Poggi-Corradini
    22. November 2015 at 09:16

    The tome has arrived!!! Woot!

  14. Gravatar of ssumner ssumner
    22. November 2015 at 09:17

    LC, I see that sort of stuff every day.

  15. Gravatar of Brian mccarthy Brian mccarthy
    22. November 2015 at 10:08

    Scott,

    You wrote: “I don’t get it. First the China bears say China needs more consumption and less heavy industry. Then when they start reducing heavy industry and boosting consumption they complain China’s going into a recession. But that’s what you called for, isn’t it? I would prefer that China allowed more outright defaults but apparently that’s not the way they do things.”

    Ok, first, I would call myself a “China bear,” but I would not share the view that “China needs more consumption” per se. What China needs is more efficient investment – investment that actually would generate the wealth / cash flows necessary for more consumption. I think this is a huge blind spot on the part of both Bulls and bears. The root problem is not the lack of consumption itself, it’s that the quality of investment sucks.

    The first step to increasing the quality of investment is to stop doing crappy investment. Those activities which are generating a net negative present value of future cash flows need to be halted and someone needs to book the resulting losses.

    You say “that’s not the way they do things.” No, it’s not. But do you see them rationalizing the capital allocation process and improving the quality of investment by some other means? Because all I see is can-kicking.

    Given this framework, I see no scope for consumption or services to take some mythical baton and painlessly keep China on the 6.5% growth pace they have deemed a political necessity without accumulating further imbalances.

  16. Gravatar of Robert Simmons Robert Simmons
    22. November 2015 at 14:26

    On PPP and the relative size of economies, you still haven’t answered the question of why that’s the right measure. You’ve given answers to other somewhat similar questions, but not to that. How much has Japan grown the last few years is best measured in inflation adjusted Yen. The average living standard is best measured in PPP terms. The importance of Japan’s economy to the US economy is (I think) best measured at market exchange rates. Is PPP a good leading indicator of where that’s going over time?

  17. Gravatar of Ray Lopez Ray Lopez
    22. November 2015 at 18:44

    Hey Robert Simmons, don’t you get it? If you advocate using market exchange rates for a country’s GDP, you believe that: (Sumner): “Ray, So Japan is in a deep depression, with GDP falling by 30%. Okay”. That’s our host’s ‘logic’. In fact, exchange rates are the best way of estimating the truth worth of a country, since they rely on the market (pace China and Japan’s perpetual manipulation of their exchange rate) rather than some UN-sponsored economist bureaucrat telling us a pizza in Angola is the same as in New Jersey, because they both use dough, cheese and tomatoes. Just trynna speak the truth, ya’ know?…

  18. Gravatar of Links 11/23/15 | naked capitalism Links 11/23/15 | naked capitalism
    23. November 2015 at 04:06

    […] Noah Smith on the Great Chinese Data Conspiracy The Money Illusion […]

  19. Gravatar of Robert Simmons Robert Simmons
    23. November 2015 at 04:39

    Ray, all GDP numbers come from bureaucrats and involve judgments, some arbitrary. The effect you keep flagging is real, but pretty minor compared to other ones. In general, I’m even less interested in your babbling than our host is.

  20. Gravatar of ssumner ssumner
    23. November 2015 at 17:44

    Brian, You said:

    “The root problem is not the lack of consumption itself, it’s that the quality of investment sucks.”

    I partly agree. There is lots of wasteful investment, but also lots of pretty efficient investment, such as the infrastructure boom. Yes, some is built in the wrong places, but also keep in mind it’s being built really fast at really low cost. And the quality of airports, high speed rail, subways, etc, seems pretty good to me.

    Robert, You said:

    “The importance of Japan’s economy to the US economy is (I think) best measured at market exchange rates. Is PPP a good leading indicator of where that’s going over time?”

    But what’s happened to Japanese exports to the US in dollar terms? I’d guess they’ve done far better than Japanese GDP in dollar terms, but perhaps I’m wrong. Does anyone know?

    I’m not sure on your leading indicator question.

  21. Gravatar of Robert Simmons Robert Simmons
    24. November 2015 at 07:22

    Not sure if this is the best source for our purposes, but https://www.census.gov/foreign-trade/balance/c5880.html. Looks like US imports from Japan in US$ grew 13.6% in 2012, -5.4% in 2013, -3.3% in 2014, and -1.7% YTD thru September. Apply that -1.7% Y/Y to Oct-Dec 2014 puts the 2015 total up 2.2% from 2011. US exports to Japan on same basis down 3.2% from 2011 to 2015E. So you’d be right on that point. Something to think about. However, you may want to check the site I’m using to make sure the data is what we want it to be.

  22. Gravatar of Robert Simmons Robert Simmons
    24. November 2015 at 07:30

    Oops, should have used 2012 as base year, in which case imports look to be down 10% this year from then. Still points in your direction, but less so.

  23. Gravatar of Ray Lopez Ray Lopez
    24. November 2015 at 17:53

    @Robert Simmons – “The effect you keep flagging is real, but pretty minor compared to other ones.” – not true. The differences between PPP GDP (which itself is suspect) and exchange-rate GDP is very significant; China is #1 in one metric but not the other. I hope you’re not a professional economist with this level of ignorance.

  24. Gravatar of ssumner ssumner
    24. November 2015 at 19:22

    Thanks Robert.

  25. Gravatar of Brian McCarthy Brian McCarthy
    24. November 2015 at 20:07

    Scott,

    You wrote: “I partly agree. There is lots of wasteful investment, but also lots of pretty efficient investment, such as the infrastructure boom. Yes, some is built in the wrong places, but also keep in mind it’s being built really fast at really low cost. And the quality of airports, high speed rail, subways, etc, seems pretty good to me.”

    Whoa, ok, to state the obvious, whether an investment is “pretty efficient,” depends not on whether you get the sense that the Shanghai-Beijing high speed rail is pretty cool relative to the MBTA, but whether the NPV of future expected cash flows (or non-pequinary societal benefits) are greater than the cost of the investment.

    The problem with China is that it has no mechanism whatsoever for making that determination. One may bemoan the imperfections in the western democratic / capitalistic system, and certainly we’ve shown ourselves capable of operating suboptimaly, but China doesn’t even pretend to have a market mechanism for making such determinations.

    Furthermore, the Chinese have tremendous latitudes to “disappear” the mistakes, all carried / rolled via the creation of bank credit.

    So what is it? China has somehow produced a central planning commission that can efficiently direct 20% investment growth in a $10T economy? Or are they simply printing to roll bad assets until the RMB collapses?

  26. Gravatar of ssumner ssumner
    25. November 2015 at 21:32

    Brian, Investment in both China and the West involves a mixture of the public and private sectors. In both places the vast majority of infrastructure is built by the public sector, or quasi-state companies. My point is that the public sector in China often builds infrastructure faster than the public sector in the US.

    Obviously the US has a far superior economic system to China, but that has no bearing on China’s near term prospects. For the moment, China’s trying to catch up with Mexico, not the US. Once they pass Mexico they’ll need more free market reforms to get up to developed country levels.

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