Smoke and mirrors: Just how big is China's economy really?
Stein Ringen says its phenomenal GDP numbers over the years have not been adjusted for bad debt and inefficient investment, and thus fail to reflect the true state of affairs
One consequence of the dramatic Chinese stock market crash is this: it has hit home that the economy is not all it is made up to be. There has been economic growth, of course, but there have also been smoke and mirrors.
Only a few months ago, the Financial Times, otherwise not an uncritical source, described China as the world's biggest economy. Today, no serious observer would entertain that kind of fantasy.
There are two main reasons why the size and strength of the economy have been overestimated. First, the official statistics have been wrong.
China has been respected, or feared, mainly because of its economic growth. But there is less strength there than meets the eye - and less reason for both respect and fear
From about 2010, even official growth rates have been edging downwards, from about 10 to about 7 per cent. But independent analysts, such as The Conference Board, Capital Economics and Lombard Street Research, have found that growth has long been officially overstated and/or that the decline has been steeper than officially stated, down now to about 4 per cent or less in annual growth.
Second, there are weaknesses in the economy itself that have not been recorded statistically. The government has stimulated economic activity by pouring in cheap credit and directing its enterprises to turn that credit into a stream of investments, some sound and some bad. The gross domestic product numbers record all of the economic activity but do not adjust realistically for the burden of bad debt and investments.
Estimates by researchers at China's National Development and Reform Commission, an official agency, suggest that near to half of the total investment in the economy between 2009 and 2013 was "ineffective". Their research also found that investment efficiency has fallen sharply in recent years, which means the economy gets steadily less additional growth for every unit of additional investment, to the effect that annual growth in the relevant period, corrected for ineffective investment, would be 2 to 3 percentage points lower than in the official statistics.
If you dig holes in the ground and fill them up again, that's economic activity without anything being produced. If you borrow money to build highways that are never used or apartments that are never lived in, that's not investment that creates real capital.