By Sara Hsu
July 15, 2014
Measuring the country’s true output remains problematic, but some reasonable hypotheses can be made. 
China’s economy appears to be slowing to some extent: the frothy investment in factory expansion and property is cooling, and the government has taken some steps to stimulate the economy. At the same time, a raft of reforms have been promised, from financial reform to serious structural change. As a result of uncertainty caused by the economic slowdown and impending reforms, as well as by existing distortions in measuring GDP, GDP growth has been somewhat unpredictable.
Long-run predictions for China’s GDP growth near 2020 currently range from 5 to 8 percent, a wide enough gap to imply vastly different domestic and international policy shifts. At 8 percent growth, China would be able to maintain its pace of reforms and continue to purchase U.S. treasuries (as long as its exchange rate remained fixed). At 5 percent growth, millions of Chinese workers would become unemployed or underemployed and China would purchase fewer Treasuries, forcing the U.S. to change its own economic model. Much additional internal and external rebalancing would be required as the global engine of growth unwound.
Short-run predictions are closer to the mark. The government quarterly and annual growth target for 2014 is 7.5 percent. Pre-second quarter forecasts were somewhat low until mid-June, with Nomura predicting a 7.4 percent growth rate, Barclays projecting a 7.2 percent growth rate, and JP Morgan forecasting a 6.8 percent growth rate. By mid-June, analysts had increased their estimates to 7.4 percent or 7.5 percent. The short-run forecasts are more accurate since the government target is more or less required (and additional funds may be spent to meet the goal), and since dramatic structural changes are less likely to occur within a quarter, half, or even a year.
However, predictions are difficult when GDP measurement may be inaccurate, even for the present day. China’s GDP calculations have often been viewed as inaccurate – usually overstated – as local officials and sectors inflate production numbers in order to please higher level authorities. GDP data is also collected and calculated by the National Bureau of Statistics within two weeks of the end of a quarter, criticized by some as too fast to be accurate. Some external calculations have not been much better. A World Bank report released in April even stated that China’s GDP was already much larger than had been previously calculated and was poised to overtake the U.S. economy this year. Doubts over the underlying International Comparison Program methodology used in the World Bank study have undermined the impact of results.
The question then remains, how can we measure GDP and how can we predict how much China’s GDP will grow in the long run?
Taking a step back, we can define GDP as a measurement of the market value of goods and services produced during a particular period. GDP tells policymakers whether an economy is generally healthy or not, to determine what approach should be taken to improve circumstances. However, China’s problem with inflated GDP numbers and its alternative method of reporting debt (rolling it over and recording it as an asset) lead us to mistrust the reported GDP numbers. Alternative indexes, most recently provided by Premier Li Keqiang, in the form of railway volume, electricity consumption, and bank loans, are problematic as well. Electricity consumption is subsidized, so that even in a downturn, electricity consumption is likely to be buoyant. Bank loans are often provided to larger state owned enterprises that may put the loans to unproductive use. Railway volume fails to capture the services component of the economy.
Although China’s GDP measurement is a serious problem, there may be ways to determine whether GDP data is more or less reliable. The National Bureau of Statistics performs checks against reported data using alternative sources. For example, household consumption expenditures are first tallied from the retail sales of consumer goods, and later checked against household surveys. We may choose to conduct our own checks on reported GDP figures as well, as some financial analysts already do. Looking at the reported figures of the primary, secondary and tertiary sectors, we can compare elements of the Li Keqiang Index and other proxies. Primary sector figures can, for example, be checked against metric tons of rice or wheat production. The secondary sector reported figures can be compared against the railway cargo volume. The tertiary sector may be checked against sales of new automobile sales and white goods, as well as against housing starts.
We can also compare the national and provincial GDP statistics. In 2011, the National Bureau of Statistics published economic data for 2010 that revealed a growth rate of 10.3 percent, while China Economic Net reported growth rates in more than 90 percent of provinces that were above this amount, revealing a large discrepancy.
Once we have an idea of how accurate GDP may be today, the issue of predicting long run GDP can then be tackled. To determine what GDP will look like in the long run, we must have a good idea of what economic policies will be put in place. We have a list of reforms that the government has announced, which is positive, yet we do not have a clear timetable of when the reforms will be implemented or how. One may thus come up with several plausible scenarios, breaking up the impact of reform on the economy by sector.
Many of the reforms will focus on the financial and other services sector, and these areas of the economy are quite likely to expand. The manufacturing sector as a percentage of GDP has remained stable at about 32 percent since the nineties, through a number of economic changes, but it may be affected by a simultaneous expansion of the financial services sector and an increase in domestic consumption of manufactured goods, which will have contrasting effects. The contribution of agriculture to GDP has gradually declined over the past twenty years, and will simultaneously be impacted by urbanization and the commercialization of agriculture. Non-sector specific reforms, such as improving environmental protection laws and improving living standards have a more nebulous effect on the economy overall. The overall goal of these reforms, however, is economic expansion.
Further, we know that the leadership wants to keep growth as high as possible. Even in the face of the current downturn, growth was maintained at levels somewhat higher than expected. The fallout was contained by rolling over debt and clamping down on some abusive financial practices. Essentially, the leadership has imposed a “floor” on how much destruction can be wrought on the economy. To what extent the floor is credible (and how much it matches up with index checks mentioned above) is up for grabs, but in name at least, GDP figures have continued to be buoyant.
What we can conclude from this brief and rough thought exercise is that China’s GDP will continue to grow through 2020, likely at levels above 7 percent, as the leadership does not want to see a dramatic slide, and that expansion is likely if the reforms are successful. The nitty-gritty of what is actually being produced in China may change a great deal, looking to some degree like the rapid reforms witnessed in the nineties. Additional productivity may be squeezed out of transforming state-run practices into market practices. High levels of GDP may mask some volatility, which can be viewed in the measurement checks, as the economy restructures.
Ultimately, some reasonable hypotheses with respect to GDP and its continuing growth can be made, as long as one knows something about the muddle surrounding GDP measurement and its changing components, and as long as China’s reform targets do not change much under the 13th Five Year Plan. At this time, uncertainty remains, but it appears to be, to some extent, restrained.
No comments:
Post a Comment