Chinese New Year decorations in Shandong Province show Mao Zedong (left) and Xi Jinping, February. © Reuters/Stringer
Trying to get a handle on what's going on in the Chinese economy is becoming increasingly difficult—and necessary. Back in September, The US Federal Reserve decided to back away from raising interest rates as it had forewarned, largely because of turbulence surrounding Chinese financial markets and uncertainty about the economy. Mario Draghi has articulated the ECB's dovishness around the same theme. The Fed looks poised to pick up the baton of higher interest rates next week, but China remains an enigma for even the most seasoned of China watchers.
The official view is that the economy grew by 6.9 per cent in the year to the third quarter 2015, and the 13th Five Year Plan (2016-2020) implicitly targets an annual growth rate of 6.5 per cent per year. This is some distance from the double-digit growth that characterised much of the two decades to 2011, and it was only to be expected that China would slow down at some point. Other than China, no country has been able to put together more than a decade of double-digit growth, and so China really was a special case. Even so, this phase has also ended. Today's problem is that more and more people doubt that the official statistics are realistic.
Some analysts try to proxy China's growth by looking at variants of the so-called Li Keqiang index, named after the current Premier before he achieved his lofty, though now rather sidelined status in view of the concentration of power in President Xi Jinping. Li, the only trained economist on the State Council, had previously said that electricity generation, freight traffic and credit gave a better idea of economic growth than GDP numbers, which local and provincial government officials came up with but under incentives to meet the official target. This index now suggests the economy is in serious trouble, but it is no longer as useful as it once was. It gives us a snapshot of what's going on in industry, but tells us next to nothing of what is happening as the role of service producing industries increases.
The problem with Chinese economic data isn't that they are sparse or unreliable, only that the construct of GDP, itself, may no longer be the ideal judgement. Data from China's 30 odd provinces reveal significant variations in economic performance. The heavy industry-dominated of the north and north-east of the country, which were all growing more slowly than 5 per cent in the first quarter of 2015, look to have slowed to 2-3 per cent subsequently. Several provinces surrounding these in the north may now be growing around 5-6 per cent. The nine provinces clustered around the coastal areas further south may still be growing at about 7-8 per cent. A more detailed analysis of provincial fiscal revenues, and of industry sales and revenues broken down by province suggests that the discrepancy between slower and faster growing provinces has become quite significant, all around an underlying growth rate that may still be a struggling five per cent.
One major research company has reworked China's national income statistics going back decades, and believes that over the last 10 years, China's official growth rate of 9.6 per cent overstated actual growth by 2.6 per cent, and that in 2015 the expected outturn of 7 per cent will overstate it by just over 3 per cent. While China is still expected to become the biggest economy in the world eventually—perhaps by 2025—the suggestion that growth has been and will remain slower than official sources assert, means that, if true, China's economic catch-up might have to be rewritten and extended over a longer period. It would also suggest, even if China's total GDP is the biggest in the world, that growth in income per head is growing more slowly than thought. This would make it more likely that China will lapse into the so-called middle income trap, in which income per head progression stalls at the equivalent (today) of about $12-15000. It is still too early to be sure because China hasn't been a middle income country for long enough to be sure it has become trapped. By 2025, we should know whether China's political leaders have unlocked the key to building the robust and inclusive institutions that could lead China over the wall, so to speak, to join the select group of 35 high income nations.
Building robust institutions, though, is not something that comes easily, and certainly not in China. President Xi's anti-corruption campaign may be removing corrupt officials from office, but it is also providing cover for a drive towards conformity, and a major crackdown on human rights, critical thinking and analysis, social media, art and culture, and generally, on "western values," including civil rights, press freedom and judicial independence. In recent weeks, for example, in addition to anti-corruption targets and people arrested for breaching the ban on discussing the Communist Party's historical errors, large groups of lawyers, feminists and academics have been arrested or brought to book.
Last week it was reported that three workers' rights leaders had been arrested. According to the New York Times, one of them, Zeng Feiyang, director of the Panyu Workers' Centre in the city of Guangzhou was arrested for "gathering a crowd to disturb social order." China does not permit independent trades unions, but labour unrest, targeted at both company management and local government officials, does seem, nevertheless, to be on the rise. This may well be related also to the slowdown in the economy, which may be starting to affect workers' expectations and conditions. There are no official statistics on labour or social unrest, the last ones having been published in 2005.
Slower economic growth, looming bad loan problems in the Chinese banking system and greater pressure on party officials and citizens to conform to the rules and regulations laid down by China's most powerful president since Mao are the foundations for concern about China's prospects. Coincidentally, Boxing Day is the anniversary of Mao's birthday: he might well look on approvingly at the political direction in which President Xi is leading the country.
