Economics / Finance / International Business

Chinese Gross Domestic Product: Interpreting Present Data into Future Outlooks

chinaAround 6 months ago, I wrote an article which mentioned China’s somewhat lagging economy, and I made the claim, as many economists have, that China is transitioning to a new normal with regard to economic activity.  However strong the Chinese economy might appear to be, its debt fueled growth cannot be sustained and as such we are likely to see some sort of “crash” in the next five to ten years and possibly sooner.  At the same time, Chinese GDP keeps climbing higher and higher as growth rates, while still lower than the double digit numbers Beijing is used to, are still more or less triple that of more developed economies, including the U.S. (“Catching the Eagle”).  However, the reason I have decided to revisit China more in-depth is because of some research I have done into the quality of the information coming out of China, particularly GDP figures and it is my opinion that China’s data is so flawed and so unreliable that metrics like GDP and GDP per capita should be much more highly scrutinized than they are now.  As the “Xinhua Insight” reported in 2014 on Chinese statistics, “one plus one equals two.  But it’s not always the case, especially when you are talking about … local and national gross domestic product (GDP) data in China” (Mossavar-Rahmani 7).  With easy math like that, it shouldn’t be too hard to examine Chinese economic data to see if it holds up to scrutiny.

First, the manner in which China collects and reports its economic data contributes heavily to the flawed nature of the numbers themselves.  China is considered decentralized in that data from the thirty-one provinces that make up the sovereign nation is collected within each province and then sent to Beijing where the data is compiled to form national statistics.  A large amount of trust is placed in the regional governments to collect and analyze their individual region’s data, but the discrepancies that come to light when comparing regional and national information highlight the fact that this trust may be misplaced.  During the past twelve years, aggregate provincial GDP levels have been on average about 6.1% higher than the reported national data.  In addition, regional government managers and employees are highly incentivized to meet growth goals on both a regional and national level to the point where a National Bureau of Economic Research report found that “higher city-level GDP growth has been highly correlated with CPC secretarial and mayoral promotions” (Mossavar-Rahmani 8). With government officials given the mandate of reaching ridiculous goals for GDP growth and GDP per capita and the promise of promotions to meet or exceed those goals, corruption is bound to take hold and statistics are more likely to be misstated.

Second, the speed with which China reports its economic data is also concerning.  Compared to more developed countries that typically take between four and six weeks to report their economic data at the end of each quarter, China delivers its numbers in about two weeks, an incredible turnaround time for a country as large and populous as China’s.  However, given the speed with which China reports this information, there comes a cost in the form of the revisions.  Typical revisions to economic data (like those of the U.S.) are systematic and thorough, starting about one mount following the end of each quarter and culminating in a report five years after the last quarter in each fiscal year which “incorporates changes in methodology to better reflect the evolving US economy” ((Mossavar-Rahmani 8).  China, on the other hand, according to the United States-China Commission (the USCC, an economic and security taskforce created by Congress in 2000), has revisions that are “frequent, large, and not always clearly explained.”  The real GDP level of 2004 has been revised upward by 16.4% due to greater service sector output, and GDP data from 2007 was also revised from 11.9% to 14.2% after more in-depth review by the National Bureau of Statistics (Mossavar-Rahmani 7).  For a more contemporary example, the last six quarters of GDP growth in China have been clustered around the seven percent mark, ranging from 7.2% in the third quarter of 2014 to 6.8% in the last quarter of 2015.  However, the Economist reports that such a small variation in the data is very improbable, especially for developing economies (as U.S. economic data from the same period would support, ranging from 4.2% in the third quarter of 2014 to .07% in the last quarter of 2015).  Private analysts use other metrics, from car sales to utility bills, to form a different picture of Chinese GDP growth, which they report at being roughly between five and six percent for the same year (“The Worries About China’s Slowing Growth”). These revelations may prove to confirm China’s real GDP growth rate when more revisions come out in several years’ time.  While China can get its data out quickly, the accuracy is debatable.

brics
Lastly, continuing on the theme of clustering in GDP data, China’s reported economic information has significantly lower volatility than its fellow BRICS economies (Brazil, Russia, India, China, and South Africa) and even more than developed countries’ economies.  The volatility in GDP year over year is about twenty-five percent less than that of the U.S. economy, and between one-third and one-half that of other Asian economies, an unusual occurrence for a developing economy as large as China.  Moreover the complete instability of other economic data provides very little concrete evidence of reliable growth indicators.  Reported retail sales growth in China, for example, “has outpaced personal income at the same time that personal savings have increased” according to the Heritage Foundation.  This is completely unfounded.  A rise in retail spending has to be linked to either higher personal income growth or lower personal savings.  This could be, as the USCC points out, the result of retail sales figures being based on supplier outputs rather than consumer purchases, a faulty measure of consumer spending (Mossavar-Rahmani 9).  The lack of volatility and inherent instability in Chinese economic data is unnerving, no doubt leading us to question the reliability of these so called “statistics”.

What is to be made of all of this faulty economic data and maybe more importantly, how does the U.S. compare?  Obviously, China has huge reporting problems with regard to accuracy and consistency among its economic information, and this pervasive issue is why even though China has the likelihood of surpassing U.S. GDP measures by 2030, those numbers might be completely meaningless.  Chinese officials can certainly say that their country’s GDP grew at seven percent over the past year, but if reports come out five years down the line that growth was actually five percent, that’s tens of billions of dollars in growth that was falsely attributed to the Chinese economy.  What’s more, GDP is widely considered a “flawed economic indicator”, helping in little ways measure the true health of an economy (Brazil’s GDP ranking is among the top ten in the world, and still the country can’t seem to escape corruption, disease, and general unrest).  These flawed statistics could have a compounding effect in the future as well, building up economic and political tensions that could give way long before the year 2030, (Illmer “China’s Growth Data”).

us-chinaWhere the U.S. is concerned, its economy is in a much more stable position.  While arguably still recovering from the Great Recession of 2008, The U.S. has already made the transition from manufacturing to service and consumer spending as the key economic drivers but that was not without the country’s own growing pains during the 1970’s and 1980’s.  With U.S. growth set for 2016 at around two percent and forecasts of full employment for this year as well, it is assured that short term U.S. prospects are positive (Rushe, “US GDP Slows”).  One thing that is also assured is that U.S. reporting of economic information is far more trustworthy and accurate than the country’s Chinese counterparts.

Sources Cited

“Catching the Eagle.” The Economist. The Economist Newspaper Limited, 22 Aug. 2014. Web. 31 Jan. 2016. <http://www.economist.com/blogs/graphicdetail/2014/08/chinese-and-american-gdp-forecasts&gt;.

Illmer, Andreas. “China’s Growth Data – Can You Trust It?” The BBC. The BBC, 19 Jan. 2016. Web. 31 Jan. 2016. <http://www.bbc.co.uk/news/business-35341869&gt;.

Mossavar-Rahmani, Sharmin, Jiming Ha, Maziar Minovi, Matheus Dibo, Gregory Mariasch, Robin Xing, Harm Zebregs, and Amneh AlQasimi. “Walled In: China’s Great Dillema.” Insight (2016): n. pag. Goldman Sachs. Goldman Sachs, Jan. 2016. Web. 28 Jan. 2016. <http://www.goldmansachs.com/what-we-do/investment-management/private-wealth-management/intellectual-capital/isg-china-insight-2016.pdf&gt;.

Rushe, Dominic. “US GDP Slows Sharply in Fourth Quarter on Weak Consumer Spending.” The Guardian. Guardian News and Media Limited, 29 Jan. 2016. Web. 31 Jan. 2016. <http://www.theguardian.com/business/2016/jan/29/us-economic-growth-slows-consumer-spending&gt;.

“The Worries About China’s Slowing Growth.” The Economist. The Economist Newspaper Limited, 19 Jan. 2016. Web. 31 Jan. 2016. <http://www.economist.com/blogs/economist-explains/2016/01/economist-explains-11&gt;.

 

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