Mainland China growth rates don't add up

Economists are questioning China's official GDP rates, saying the numbers no longer fit reality

PUBLISHED : Monday, 14 July, 2014, 3:09am
UPDATED : Monday, 14 July, 2014, 6:24am

How big is China's economy? Well, partly it depends on which economist you ask.

About 36 per cent smaller than official government figures would have people believe, calculated economics professor Harry Wu, in a recent report for the Conference Board, a New York-based advisory group.

"Examining changes over time, our new results show greater volatility and slower growth than the official estimates," Wu wrote.

He said annual gross domestic product growth averaged 7.2 per cent between 1978, when market reforms began, and 2012, a significant 2.6 percentage points lower than China's National Bureau of Statistics' figure of 9.8 per cent. Between 1952 and 1977, growth was roughly in line with the government figure of 4.3 per cent.

Wu's findings are likely to give business leaders and forecasters pause for thought and reignite the debate regarding reliability of official statistics. While the report does not diminish China's achievements - Wu believes China and the US are almost neck and neck when compared using purchasing power parity - it does suggest some of the more bullish forecasting and associated hyperbole could be tempered.

"Given the sheer size of the Chinese economy, and its now enormous engagement in the world economy, a flaw in such a major growth indicator is anything but trivial," Wu wrote.

When explaining discrepancies between his data and the statistics bureau's, Wu said the government under-reported inflation and so real GDP appeared larger than it was. Production output and prices were overstated, especially prior to 2002 when elements of the Soviet-style control economy still lingered, and the government also "covers up" economic slumps.

Among other techniques, Wu built weighted indices as "anchors" to track the price of goods and services and their inputs and outputs, and he adjusted his weightings every five years. "The residual will give us the value added," he said. This is Wu's fifth revision of China's GDP.

"We should not deceive ourselves into thinking that it is possible for anyone to come up with a definitive alternative GDP series to the official figures," said Arthur Kroeber, the managing director of Gavekal Dragonomics Research.

Trying to work out historical growth patterns was highly judgmental, Kroeber said, and it might be better to simply accept that China's economy grew "really fast" over the past 30 years on a par with Japan, Taiwan and South Korea during their "investment-intensive high growth eras".

Underlining the challenge involved in studying economic growth, Chinese GDP data from the Conference Board's own in-house estimates shows a third set of results. Like Wu, the Conference Board uses purchasing power parity to compare economies, but under their scenario and based on last year's numbers, China's economy is 17.8 per cent smaller than the rebased NBS numbers.

Wu's data shows especial divergence from official statistics during global downturns.

In 1998, a year after the Asian financial crisis erupted, Wu said China's economy grew only 0.6 per cent, against an NBS number of 7.8 per cent. Likewise, in 2008, after the US sub-prime meltdown, Wu said China's economy expanded 4.7 per cent. The NBS reported 9.6 per cent growth.

"I think this is very sordid evidence the official estimates tend to exaggerate their performance when the economy is in bad times," he said.

"That there may have been an understatement of the GDP deflator is not something that people are going to disagree with very strongly," said Michael Pettis, a finance professor at Peking University. "I don't think we have seen anything as dramatic as Wu's argument."

Wu said he did not use "anecdotal evidence", such as bad debts floating around the banking system, to influence his data. Nor does he discount any double counting or white elephant investment projects built by ambitious local officials hoping to boost GDP numbers, although he is aware they exist.

If Chinese banks wrote down bad debts like banks in the US or Britain, GDP growth could be even lower, said Pettis, although he is not sure by how much.

Japan's economy went from representing 10 per cent of global GDP in 1980, to 18 per cent by 1992, said Pettis. Today, Japan is again 10 per cent of the global economy. The huge swing was partly due to an initial reluctance to write off bad loans and this distorted analysts' understanding of the economy's performance, he said.

Wu said economists still struggled to understand how the NBS calculated GDP. The service sector is growing 5 to 6 per cent a year, according to government data. Wu believes the sector's growth is closer to 1 per cent.

As a new graduate, Wu joined the "Young Economist Forum" centred on former premier Zhao Ziyang. He left China in 1988, a year before his mentor's downfall during the Tiananmen Square protests. He now works at a Japanese university.

Beijing's habit of setting exhortatory GDP targets each year has long prompted concerns about manipulation. Analysts now construct quirky indices to capture "tangible" data less susceptible to human meddling.

Stephen Green, the head of Greater China research at Standard Chartered Bank, has referenced cement and steel production, electricity usage, and KFC restaurant sales, as proxies to measure growth cycles. In a research paper last year, he recalculated 2011 and 2012 GDP growth to 7.2 and 5.5 per cent. This compared with NBS' 9.3 per cent and 7.8 per cent.

Wu's data was less bullish. He thinks the economy grew 6.3 per cent and 4.1 per cent in those two years, respectively.

"Anyone close to China's statistics-issuing process understands that the collection and analysis of data is uncorroborated, non-transparent, inconsistent over time, incomplete, and always self-contradictory," wrote Anne Stevenson-Yang, in a recent report on steel production numbers, which she tracks alongside other commodities.

The co-founder of China research company J Capital, Stevenson-Yang feels GDP is a useful indicator of an economy's change and growth but it fails to capture static size.

The NBS is reportedly going to amend its own accounting models by including research and development expenditure into its calculations. Nomura analysts estimate this will boost nominal GDP by 1.5 to 2 per cent and real GDP by 0.1 per cent, once inflation is taken into account.

Even after taking into account Wu's research, China is still the second-largest economy when compared against other nations using market exchange rates.

When economies are growing quickly, Wu said, people would not worry "if there is 1 or 2 per cent differences" in calculations, but as the economy matured, "the accuracy of the growth rates becomes more sensitive".