The first question regarding China’s newly released economic data is not how fast the country grew last year, but whether the National Bureau of Statistics of the People’s Republic of China will provide accurate information about GDP and more useful measures, such as household consumption.
The answer is: to some extent.
The Chinese economy is undergoing a cyclical recovery and the bureau can honestly report a noticeable improvement. Two large qualifiers support this statement: First, the bureau never provides much valuable information due to political imperatives and flaws in its GDP accounting. Second, the recovery is cyclical, not structural.
China’s economy was structurally weakened under Chinese President Hu Jintao’s (胡錦濤) government and it will continue weakening slowly until market reforms restart. Chinese data does not reflect this weakness or the incentives at work in Beijing. The US needs to take its own measurements of China’s economy to improve its policymaking.
The Chinese Communist Party suppresses information it dislikes; how could anyone argue that quarterly economic reporting is exempt?
Beijing almost never reports genuine unemployment numbers as they are too sensitive. It counts only a subset of unemployed in the cities and none in rural areas. The Chinese government’s official unemployment figure of between 4 percent and 4.5 percent may be off by a factor of five if rural figures were included.
Housing prices, non-performing bank loans and coal production are other examples of important figures not publicized if the outcome is sour.
Is the quality of the data provided improving? It is not clear that it is.
Some improvements have been made, but other steps look manipulative. A revision of data typically yields more of what the bureau wants to find: more consumption, more services and so on. The revisions are always incomplete, so the end result is less comparability, less consistency and less transparency.
These problems come to a head over GDP and its constituent elements, like investment and consumption.
When China publishes GDP figures, it releases indicators that look like investment and consumption: fixed asset investment and retail sales. However, these indicators are virtually useless. More accurate components of GDP are released much later.
How can GDP data be available within two weeks of the end of a quarter — compared with two months in far richer countries — yet its principal components are not available for months afterward? Revisions always result in higher GDP.
Another fault is intrinsic. GDP is an accounting tool for annual expenditure or production, but a poor way to describe economic performance over time.
Beijing embraces short-term projects, such as constructing buildings, tearing them down and rebuilding them. This adds to China’s GDP, but actually contribute nothing to the country’s wealth. China also runs the world’s biggest trade surplus, each dollar of which adds to its GDP, but does restricting competition from imported goods and services really boost Chinese prosperity?
The scope of this problem makes it hard to grasp. Growth in the narrow money supply (M1) hit a 15-year low in 2011 and fell further last year. This is compatible with a major economic shift. Yet GDP growth remained within its historical range and is now rising. The relationship between M1 and GDP has changed in a somewhat suspicious way, but where does this problem stem from? There is little foundation on which to proceed with this question.
This is the context in which to frame the bureau’s reports: GDP data for the fourth quarter and last year as a whole were going to outperform whatever expectations were set. GDP growth was thus reported at 7.9 percent for the quarter and 7.8 percent for the year, pushing annual output higher than US$8 trillion — more than half of the US’. Other measures suggest that annual growth was lower than this, but the fourth-quarter growth figure is close to being accurate.
More importantly, household income in both rural and urban areas outpaced GDP. Strong output growth in the middle of the past decade contrasted with comparatively weak income growth — a problem that is no longer visible. Income inequality is now the problem, which is not reported.
Figures on the components of GDP are similarly dubious. Fixed investment appears to be slower, which is welcome because it is excessive. Consumption was said to generate more than half of China’s GDP. However, fixed investment still rose faster and was far larger than retail sales, while the national trade surplus grew three times faster than retail sales.
One cannot see consumption-driven growth in the numbers published by the bureau. Trends in industrial production and the purchasing managers’ index are also incompatible. GDP is not too far off, but more important indicators are muddled.
The typical observation made about China’s economy is that it has been weakening because reported GDP growth has slipped from 13 percent to below 8 percent. This is a symptom, not the disease, and GDP is not a good measurement of health.
China’s economy began faltering while GDP growth was still accelerating. With the arrival of a new government in 2003, the imbalances now plaguing the economy first manifested as market reform faded and fixed investment spiked. Growth in fixed investment jumped 10 percentage points in 2003 and has not returned to its 2002 level.
The gap between fixed investment and gross fixed capital formation — the world’s investment measure — has widened, suggesting greater waste.
Genuine Chinese consumption is weaker than suggested by retail sales. The performance is not weak in absolute terms; it simply cannot keep pace with investment.
Some observers claim that consumption has been underestimated, but without carrying out a similar evaluation of other indicators and distribution over time this says little.
More investment than consumption leads to a parallel imbalance between supply and demand. For instance, more than one-third of Chinese shipyards received no orders last year. Officially, auto sales weakened last year — though this data is spotty — while auto capacity continues to expand. When demand is inadequate, high investment breeds debt rather than expansion.
Rising debt indicates that the country’s economic performance is unsustainable. China’s economic trend is hard to establish because debt is often treated as a state secret. A Chinese Academy of Social Sciences corporate survey put the 2011 debt-to-asset ratio at 105 percent, the highest among the 20 countries evaluated in the survey. This bottom-of-the-list debt performance came after years of record-beating official GDP growth data.
If expansion requires domestic debt, it will not last. Foreign demand is unreliable and less important to China than it was a decade ago. The only solution is internal reform. Beijing must innovate and it must make more efficient use of its battered land, a labor force that will soon stop expanding and its capital.
Stronger ownership rights — to both intellectual property and land — would accomplish the first two objectives and sharper competition the second two.
If these improvements are not made, the economy will stagnate and political imperatives will then overwhelm any methods of improvement, pushing Chinese data further away from reality.
Beijing is ostensibly becoming an economic rival to Washington and could even be a contender to become the new leader of the global economy. The US cannot be seen as taking that challenge seriously if it considers official Chinese economic data accurate rather than driven by politics or otherwise misleading (as with GDP).
It is time for the US to generate its own estimates of important Chinese economic statistics to guide policy in bilateral ties and clarify the economic balance. This would both raise the quality of US policy and offer its friends and allies a more accurate picture of the global economy.
Specifically, the US departments of the treasury and commerce, along with the CIA should compile an independent economic report measuring China’s wealth, unemployment and other vital information and publish it on an annual basis.
A cyclical economic recovery means official data concerning Chinese economic aggregates for last year are not too far off. However, structural weakening will continue and the cyclical recovery will ebb by the end of this year if it is not reformed. If that happens, official statistics will become less useful again.
For its part, the US can and should do better than parroting the latest claim that GDP growth exceeded China’s target.
Derek Scissors is senior research fellow in Asia economic policy in the Asian Studies Center at The Heritage Foundation.