World’s growth engine sputters

The Chinese economy is slowing down — on this, almost everyone seems to agree. Last year, official GDP growth in China came in at 6.6 per cent, which beat the official estimate of 6.5 per cent, but was still the slowest mark for the world’s second-largest economy in almost three decades. And it doesn’t look like it’s going to get much better.

Even as there are signs of hope from U.S.- China trade discussions, Premier Li Keqiang, in his opening speech to the annual National People’s Congress earlier this month, downgraded official growth projections for 2019 to a range of six to 6.5 per cent. Even at the top end of that band, this year is shaping up as a new low for economic expansion.

All this of course matters deeply to investors, international businesses and economists. China is the biggest driver of global growth, so its slowdown — or fear of it — is stoking concerns about the prospect of a worldwide recession. It’s no wonder, then, that its economic data are closely watched, analyzed, discussed and debated by market-watchers around the world, especially now.

But there’s an underlying irony here, because even as the growth picture for China is a matter of intense interest, skepticism over the reliability of its economic data is just as intense. In the West, conventional wisdom holds that while you must pay attention to Chinese economic data, you would be a fool to trust it. That only serves to further undermine confidence. To the extent that China might be putting too rosy a lens on its economy, the big question remains: How much worse are things there than the government is letting on?

Let’s back up a bit. Skepticism over China’s official GDP statistics has a long history, and is founded on more than mere Western suspicion of an economic rival. For one thing, there’s the uncanny smoothness of the data — it almost never deviates more than 20 basis points from quarter to quarter, a consistency that is unheard of in Western economies. For another, it only very rarely fails to meet or exceed official projections — annual GDP growth has done so only twice in this century. For a third, there’s the lack of transparency over the methodology the National Bureau of Statistics uses, especially the inflation rate it employs to render real GDP — some suspect it is too low, but no one really knows. For a fourth, critics point out that national GDP calculations rely on local government data, and local officials are incentivized to overstate economic activity because their performance is appraised on reaching growth targets. So, you know, moral hazard.

Now, none of this actually proves China is cooking the books. And some will point out, rightly, that a command economy like China’s shouldn’ t be expected to behave the same way as Western ones do. After all, the government can ramp up economic activity pretty much when and how it chooses — no time-consuming political debate necessary. If its goal is simply to meet a target, it doesn’t have to fudge the numbers: it can just turn on the stimulus taps.

Still, that doesn’t address the unreliability of the input data. To be fair, the Chinese statistics bureau is well aware of the issue, so in calculating national GDP it applies a discount to the locally provided data. Yet various outside analysts have come up with a plethora of ways to get a more accurate read on the Chinese economy based on more verifiable data. Among the most popular is the Li Keqiang index, so named because the Chinese premier himself, in 2007, reportedly expressed skepticism about the government numbers and told a U.S. official that he looked at only three indicators: growth in bank loans, electricity consumption and rail freight.

Others look at some combination of some of those factors along with retail sales, agriculture, industrial output, and even luminosity — a reading of night lights derived by satellite imagery.

One of the more comprehensive alternative looks at the real state of the Chinese economy was released this month, in a study authored by researcher Wei Chen, Xilu Chen and Zheng Song of the Chinese University of Hong Kong and Chang-Tai Hsieh of the University of Chicago. In it, the authors looked at nominal GDP, thereby avoiding the fuzziness over inflation rates, and among other indicators compare official GDP data with economic activity implied by China’s value-added tax — which, thanks to a government crackdown on tax avoidance, the researchers consider fairly reliable. They found evidence that the NSB has, since 2008, not been making big enough adjustments to locally provided data, but their biggest bombshell was this: “Relative to the official numbers, we estimate that GDP growth from 2008-2016 is 1.7 percentage points lower.” That’s kind of a big deal — and would mean that nominal GDP in China, officially

IT ONLY VERY RARELY FAILS TO MEET OR EXCEED OFFICIAL PROJECTIONS.

more than US$13 trillion, is actually nearly 20 per cent smaller, according to calculations by the South China Morning Post.

So does this mean the Chinese economic miracle is a sham? Hardly. Even discounting by two percentage points a year, the average annual growth between 2008 and 2016 would still come in at around 5.5 per cent — and this, while much of the rest of the world was limping along in a post-recession hangover. As well, it’s not surprising that something as tough to accurately compile as GDP — tough even in developed countries — should be a challenge in China, whose economy is already big and complex and getting bigger and more complex by the day.

As the St. Louis Fed points out, even if every bit of information compiled by the NBS were accurate and never manipulated, the official GDP would probably still be flawed. And there’s evidence that the NBS is getting better at it: recent official numbers have been largely in sync with alternative indexes, according to Bloomberg.

So, yes, investors should take the official GDP numbers from China with a grain of salt — you’d be a fool not to. Apply a discount if it matters to you. But don’t freak out about their accuracy. What matters more is the direction of the growth curve, and whether you peg GDP growth 6.5 per cent or 4.5 per cent, it’s still pointing down.