In­ac­cu­rate data are hid­ing the real state of China’s econ­omy

The Globe and Mail (BC Edition) - - REPORT ON BUSINESS - BAR­RIE McKENNA

Don­ald Trump is con­vinced China is ready to make big trade con­ces­sions be­cause it’s on the ropes eco­nom­i­cally. “I think China wants to get it re­solved. Their econ­omy’s not do­ing well,” Mr. Trump said re­cently. “I think that gives them a great in­cen­tive to ne­go­ti­ate.”

The prob­lem is that no one re­ally knows how poorly, or how well, China is re­ally do­ing – least of all Mr. Trump. The coun­try’s eco­nomic sta­tis­tics are no­to­ri­ously un­re­li­able. At times, Chi­nese au­thor­i­ties bla­tantly fake them.

“Some­times they prove in­ac­cu­rate,” Derek Scis­sors, res­i­dent scholar at the Amer­i­can En­ter­prise In­sti­tute in Wash­ing­ton and cre­ator of the China Global In­vest­ment Tracker, ar­gues in a new re­port. “Dur­ing down­turns, they are fal­si­fied out­right.”

The state of China’s econ­omy is in the spot­light again as U.S. and Chi­nese ne­go­tia­tors re­sumed talks last week to re­solve their es­ca­lat­ing trade fight. The ne­go­ti­a­tions are the first since Mr. Trump and Chi­nese Pres­i­dent Xi Jin­ping called a tem­po­rary tar­iff truce at the Group of 20 meet­ing in early De­cem­ber. The United States is push­ing China to buy more U.S. goods and ser­vices, fur­ther open its do­mes­tic mar­ket, en­hance pro­tec­tion of in­tel­lec­tual prop­erty and slash gov­ern­ment sub­si­dies.

The gen­eral con­sen­sus is that the Chi­nese econ­omy is slow­ing. This month, tech­nol­ogy gi­ants Ap­ple and Sam­sung both blamed weaker de­mand in China for missed profit and rev­enue tar­gets.

That’s ob­vi­ously a bad omen, for China and the global econ­omy more gen­er­ally. China has been a key en­gine of growth for the world in the past cou­ple of decades.

But the lack of re­li­able data makes it vir­tu­ally im­pos­si­ble to know with any cer­tainty whether the Chi­nese econ­omy is suf­fer­ing a mild cold, the flu or some kind of chronic dis­ease. It’s also not clear whether the re­cent slow­ing is solely be­cause of its tar­iff war with the United States, or some­thing deeper and struc­tural hap­pen­ing do­mes­ti­cally.

Mr. Trump’s con­tention that China is “not do­ing well” is at best an un­e­d­u­cated guess. U.S. Com­merce Sec­re­tary Wil­bur Ross di­alled up the doom-and-gloom rhetoric, telling CNBC last week that China is fac­ing the threat of civil un­rest be­cause it can’t cre­ate the “mil­lions of mil­lions jobs” needed to pacify peo­ple in ru­ral ar­eas.

“That cre­ates a real so­cial prob­lem,” Mr. Ross said. “That’s a very dis­grun­tled group of peo­ple.”

But who re­ally knows? China’s of­fi­cial GDP growth tar­get for 2018 was 6.5 per cent – not that far off the 6.7 per cent to 6.9 per cent rate of GDP growth it has ex­pe­ri­enced in the past few years. Granted, that’s a lot slower than the 10-per-cent clip the coun­try was ex­pand­ing be­fore the 2008-09 pe­riod. But it’s still dou­ble or triple the pace Canada and most other de­vel­oped coun­tries are grow­ing.

Mr. Scis­sors points out that while GDP stats typ­i­cally bounce all over the place for most other coun­tries, China has en­joyed mirac­u­lous sta­bil­ity, from quar­ter to quar­ter and year to year. Re­mark­ably, China’s econ­omy rou­tinely hits the tar­gets set out by the gov­ern­ment. A tally of the in­di­vid­ual com­po­nents of GDP of­ten doesn’t match the head­line to­tal. That sug­gests that Chi­nese of­fi­cials may be de­lib­er­ately smooth­ing num­bers to paint a pic­ture of sta­bil­ity – for its own peo­ple, and the rest of the world.

The sta­tis­ti­cal fak­ery isn’t lim­ited to GDP fig­ures. Data on in­vest­ment, in­comes, debt, labour pro­duc­tiv­ity, stock mar­ket cap­i­tal­iza­tion and em­ploy­ment are equally du­bi­ous, ac­cord­ing to the AEI’s Mr. Scis­sors. Em­ploy­ment data, he says, are “bor­der­line use­less.” Of­fi­cial Chi­nese fig­ures show that the coun­try added jobs ev­ery year from 2002 to 2016, even through the worst of the 2008-09 fi­nan­cial cri­sis and global re­ces­sion. Un­em­ploy­ment has never risen above 4.3 per cent.

The United States and other coun­tries should be push­ing China in trade talks to be much more trans­par­ent.

The most im­por­tant puz­zle is what’s hap­pen­ing now. Some econ­o­mists be­lieve China’s econ­omy is prob­a­bly grow­ing at less than 6 per cent a year. That would be by far the weak­est pace since 1990.

Mr. Scis­sors’s con­clu­sion: “China is in­debted, ag­ing and in need of an eco­nomic strat­egy to re­spond to those chal­lenges.”

If that’s true, China will need a lot more than a trade deal with the United States to right its eco­nomic ship.

And Mr. Xi’s in­abil­ity to ad­dress those chal­lenges could pose a far greater threat to the global econ­omy than the trade war that has gripped fi­nan­cial mar­kets in re­cent months.

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