Tuesday, 19 August 2014

Re-examining China’s dubious growth figures

New Zealand’s Minister of Trade Tim Groser says he’s not “China sceptical”. Mr Groser has repeatedly said during his time at the helm that while China needs to be watched closely, there’s no empirical reason to worry it might fall over.

However, a paper released recently by the New York-based business research group The Conference Board suggests estimates of China’s GDP growth have always been inflated. The frightening thing about the report is that this problem could be much more profound than anyone thought.

According to the paper, authored by Harry Wu, China’s unadjusted GDP could be inflated by an eye-watering 36%. In other words, if China’s nominal GDP was measured at $US8.2 trillion in 2012, then the new estimate means China is $US700 billion smaller than Japan.

That’s worrying by itself, but another key finding reveals a “strong upward bias” in official GDP estimates. Removing that bias allots China a significantly lower aggregate growth rate over decades. For instance, using the correction, the new estimate for China’s growth rate from 1978-2012 is actually 7.2% per annum. That’s almost a full 3% lower than the 9.8% official estimate for the same time period. 

During 2008-2012, China’s GDP might have fallen to on average 6.5% per annum, rather than the official figures of 9.3%. In 2008 alone, the official figures say growth was 9.1%, but they might only have touched 4.1%.

The measurement suggests China is more susceptible to external shocks than Beijing has previously made out. On top of this, the inaccuracies of the official GDP reports are “non-systematic”. In other words, political influences might be smudging the figures.

In what is probably the driest academic understatement of the year, the research group says that, if they’re correct, this news is “anything but trivial”. Of course, it should be pointed out that an American research group measured these figures. The new figures are not coming from China or from a more conciliatory nation elsewhere.

But that’s not exactly the takeaway from the paper. Questions have been raised before about the reliability of China’s GDP figures. And relying on totality numbers like gross domestic product probably isn’t the best way to accurately measure China.

But then, how should China be measured? That’s a real problem. When the enormous amounts of raw materials consumed by China are factored, the country simply has to be growing at phenomenal rates.

It already imports more crude oil than the United States, consumes half the world’s coal, and builds sprawling cities with simply gigantic quantities of iron ore. One statistic even found China using more concrete in the past four years than the United States did during the entire 20th Century. This is despite the fact that China is still almost one-third the size of the United States.

The old GDP figures (without the correction) account for the raw materials, but if the re-estimation is correct, then the question needs to be asked where most of the goods have gone? Perhaps China’s reputation for waste and inefficiency isn’t too far wrong.

China’s President Xi Jinping is reforming his country’s economy, tightening the runaway construction and industrial capacity. Now he might have more of an obstacle to overcome than anyone imagined and one that will take much longer to fix.

That’s why the China problem is so urgent and why the true figures really do matter. Chinese success relies on moving towards a more sustainable economic model. If Beijing can’t know what the real GDP figures are, then how can it quantify the problem it’s facing? Then again if the economic inaccuracies are a result not of the economic system but political influences, then maybe Beijing knows more about the Chinese economy than they let on. One would hope that is the case.

Equally, China’s economy might be larger than the official figures suggest, we just don’t know. China uses resources differently to Japan or the United States, so on one level it makes sense that resource consumption would be higher than its GDP might reflect.

However, even though China’s GDP figures are inaccurate and aren’t a helpful gauge of their economy, the inefficiency of the system is a dangerous limiter in a booming economy. China’s very existence pivots on the ability of the current regime to forcibly evolve the economy into a more sustainable structure. Time and speed are crucial for Beijing, so an indication this might take much longer will not be reassuring.

Any China forecast must to keep all this in mind. It’s getting harder to unveil true growth figures in China because the usual tools aren’t working like they do in more open countries. More than any time in the past, we’re now only getting a partial picture of Chinese reality. 

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