Beijing's statistical sleight of hand
China hasn't beaten the business cycle, it's just tampered with price data
At times over the last five years, enthusiasts for China's economic policies have claimed that Beijing has succeeded where everyone else has failed by finally eliminating the business cycle.
While the developed world slumped into a protracted downturn in 2008, they pointed out that China maintained its rapid growth rate.
Look at the data and it seems they have a point. Not only has China's growth rate over recent years been fast, for an economy growing so quickly it's been remarkably steady, remaining for the most part in a stable band between 7.5 and 12 per cent.
It's not just growth. Inflation too has been enviably consistent, staying mostly between minus 1 and 5 per cent.
To some observers this is powerful evidence that Beijing has indeed mastered the economic cycle. To others, however, the numbers look suspiciously smooth.
Misgivings about the quality of China's economic data are nothing new, of course. A few months ago Christopher Balding from the HSBC Business School at Peking University caused a stir when he suggested that China's statisticians have routinely understated price levels, so exaggerating output.
Now researchers at Columbia University in New York have shed some more light on what may be going on. In a new study they point out that as households get richer, so their consumption mix changes.
Typically as incomes rise, consumers spend a smaller proportion of their total expenditure on basic necessities and more on relatively luxurious goods and services.
For example, as people get richer, they spend a smaller proportion of their cash on staple foods like rice, and more on eating out in restaurants.
As a result of this shift in spending patterns, argue the Columbia researchers, the official shopping basket of goods and services used to calculate the consumer price index may no longer reflect actual spending patterns. In turn that means the official inflation figures will no longer accurately track price changes in the real economy.
In an attempt to come up with a more representative data set, the researchers recreated China's consumer inflation figures based on survey data for household spending.
Their results showed that during the 1990s, official figures tended to overstate consumer price rises at a time when China was actually in deep deflation.
In contrast, in recent years the official data has played down price increases, while in reality consumer inflation has repeatedly hit double-digit rates (see the chart).
This tendency to tamper with price data shouldn't be too surprising, given the role that inflation has played in sparking past episodes of political turbulence.
But there are wider effects. If you understate inflation, you will unavoidably overstate real consumption growth (and vice versa). And if you overstate consumption growth, you will exaggerate your overall economic growth rate.
As a result, the Columbia team concludes that in the late 1990s China's urban consumption growth was considerably faster than official figures indicate. Conversely, in the late 2000s, real consumption was far weaker than Beijing claimed, contracting sharply in 2007 and 2008.
"Our estimates suggest that official statistics present a smoothed version of reality," they note, implying that China's actual economic performance has been far more volatile than Beijing would like the world to believe.
Alas, the economic cycle has not been vanquished.