China has again announced fast growth with low inflation. And again, the People’s Republic of China (PRC) will be widely praised as a future, or even current, economic superpower. However, other facts have not changed, and in these instances stability is not a laudable goal.
Once more, there are inconsistencies in the most basic and prominent official Chinese data. To the extent official data are reflective, persistent imbalances within the economy are no smaller and may be worsening. The loan stimulus so effective in pushing the PRC past an economic rough patch has now faded. Growth, while still strong, is waning as the stimulus fades, highlighting another round of damage inflicted on the financial system.
China’s GDP officially rose 11.1 percent year-on-year in price-adjusted terms in the first six months of the year to almost US$2.54 trillion. As expected, second-quarter growth decelerated, to 10.3 percent. The consumer price index rose 2.6 percent, completing a picture of slower, but still rapid growth along with contained inflation.
A second glance is troubling, though. The arithmetic comparison of GDP in the first half of the year with GDP in the same period last year shows a nominal gain of 23.6 percent. The difference between nominal and price-adjusted, or “real,” growth is the GDP deflator. The deflator measures price increases at 12.5 percent, sharply at odds with consumer inflation.
An explanation is in China’s data revisions. Beijing issues economic numbers only two weeks after a quarter ends, an impossible feat in the world’s most populous country. One correction for the premature data is supposed to be revisions, but these have not been helpful. China only revises GDP growth higher and does not revise most of its other figures, so revisions render most statistics on the Chinese economy incomparable.
The revisions last year seemed better. Overall GDP growth was raised, again, from 8.7 percent to 9.1 percent, but for the first time, quarterly breakdowns were provided. These show higher GDP in the first half of last year, lower year-on-year nominal growth of 16.7 percent for this year and a reasonable GDP deflator of 5.6 percent.
However, it seems odd for such a small revision to real growth to correspond with such a dramatic change in the deflator. It turns out that although the revisions entailed a sizable decrease in the initial level of GDP for the fourth quarter of last year, there was no corresponding decrease in real growth for the quarter. One way to represent that disparity is a considerable and convenient after-the-fact reduction in the GDP deflator. It may be that China simply moved an important statistical discrepancy away from the spotlight.
Prices also influence the major components of GDP. China’s National Bureau of Statistics provides poor measurements for investment and consumption, releasing better indicators less frequently and very late. Fixed-asset investment rose 25 percent to US$1.68 trillion — equal to almost two-thirds of GDP, a ratio that climbs as the year goes on. Investment growth is nominal, and real growth would be lower by an unspecified amount.
Retail sales — the official benchmark for consumption — were said to gain 18 percent to US$920 billion. Nominal sales growth was near 24 percent (unrevised). While this matches investment, the gap between the sizes of investment and of consumption in the first half of the calendar year has ballooned past US$750 billion. Stimulus was investment driven and worsened this imbalance. There are also powerful reasons at the sector level to worry about comparatively inadequate consumption, despite its robust growth.
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