The country’s new GDP report states that the economy grew by nearly 7 per cent last year—but can we trust the figure?by George Magnus / January 22, 2018 / Leave a comment
Last week the Office for National Statistics reported that it has over several years underestimated the fall in prices in the telecommunications sector, the implications of which, including for GDP, are significant. Credit to the ONS for admitting its errors and making amends. Contrast this, though, with China’s systematic exaggeration and manicuring of its own GDP figures, which matters because of the country’s significance in the world economy and for key markets.
In the last few weeks, a handful of China’s northern provinces and cities have admitted to falsifying GDP numbers by a margin of 20 per cent or more. These include the provinces of Liaoning, Shanxi, and Inner Mongolia, and the port city of Tianjin. The admissions have come mainly from areas where mining, metals and heavy industry figure prominently, and reflect the government’s new determination to prioritise the quality of economic growth rather than the volume, and to try and hold local governments to account. However, it is very likely that the practice is more widespread than admitted, even if not always so marked, and the government’s claim that the national data are not influenced by inflated provincial figures isn’t really plausible.
The problems with the Chinese GDP figures do not stop there. The problem is not just that the data are carefully manicured, but something deeper. GDP does not even seem to be tracking activity in the economy properly in the way that one might expect. Not only have some provinces made their figures up—the figures as a whole are behaving unusually, which suggests something even more problematic.
China’s latest GDP report, produced last week, said that the economy grew by 6.8 per cent in the year to the last quarter of 2017, and 6.9 per cent for the whole year. However you slice it, and even taking some falsification into account, this seems like a remarkable accomplishment.
But it is less remarkable when you consider the following. Annualised GDP growth has been reported at between 6.6-7 per cent in every quarter for the last three years. Indeed, if you look at a chart of GDP growth following the V-shaped pattern that all nations experienced between 2009-11, you’ll see a very gentle, downward-sloping straight line to the present day. Yet this doesn’t describe adequately what happened at all.
We know, for example, that between 2011-15, the price of industrial commodities, which are highly sensitive to Chinese demand, fell by about 36 per cent. This had a profound impact on many emerging and less developed countries who are exporters of commodities, and contributed to the stagnation of world trade and exports. However, China’s GDP data did not suggest anything was remiss. By the same token, these prices have risen by over 20 per cent since the 2015 nadir, but again there’s nothing in China’s GDP data pointing to the economic rebound that would have contributed to this.
“A handful of China’s northern provinces and cities have admitted to falsifying GDP numbers by a margin of 20 per cent”
Similarly, it is curious that while the GDP series is smooth and unremarkable since 2011, the cycles for interest rates and monetary and financial conditions are far more volatile. The authorities were clearly driven by a sharp weakening in economic activity towards a significant easing of policies in 2012, and again in 2015-16, especially after stock market and currency turmoil. On the other side they embarked on significant tightening in response to strong cyclical upturns in 2011, 2013-14, and again last year. The financial crackdown on shadow banking and on more egregious forms of financial behaviour and risk-taking shows no signs of ending yet. The point though, is that there’s nothing in the GDP series, in 2017 for example, that gives a clue to the scale of the economic rebound, or the weakness that preceded it, for that matter.
These things matter not only for the conduct of sound and timely economic policies in China, but also to the rest of the world. China’s growth variability—and its imports of goods and services—matter. These things matter to developments in China’s financial markets, to global markets, and to global investors, who China is attempting to lure more and more into the mainland. So far, foreigners own little more than 2 per cent of China’s equities and bonds, but the inclusion this year of 222 Chinese A-share stocks into the MSCI benchmark index of global equities means that foreign investors who track the benchmark will have to own more Chinese equities. China is pushing for similar development in global bond benchmarks.
China’s GDP and the nuances surrounding it are important for other reasons. They are central to the debate about climate change, for example. We need to know if the variability in CO2 emissions is primarily down to fluctuations in economic growth, or due to carbon emission policies that have much longer-term consequences. Notwithstanding China’s green rhetoric and its development of alternative energy supply, it remains the world’s largest CO2 emitter.
With the global economy emerging from a trade funk in 2017, it is important to know to what extent world trade developments are attributable primarily to short-term changes in demand coming from China or to the success or failure of trade policies themselves. The upbeat consensus for global economic growth this year should mean a good year for world trade, but equally it is clear that the US-China relationship is becoming more adversarial. Trade policies between them and perhaps more generally may become more harmful to growth.
China’s financial crackdown, as mentioned earlier, still looks to be in full swing. However, along with restrictions on residential real estate purchases and mortgage financing, it is already starting to dampen down economic activity. At the end of 2017, for example, and according to a myriad of other statistics that the Chinese authorities publish, GDP may have already slowed to an annualised rate of 5-5.5 per cent.
It will be important to monitor what goes on away from official GDP to gauge not only the implications for the world economy but for what Chinese policymakers do next.