China’s GDP Drives Economic Debate – Analysis

By Michael Lelyveld
October 21, 2015

http://www.eurasiareview.com/21102015-chinas-gdp-drives-economic-debate-analysis/

China’s latest official figures are likely to sharpen the already acrimonious debate about the true pace of the country’s economic growth.

On Monday, the National Bureau of Statistics (NBS) announced that China’s third-quarter gross domestic product (GDP) rose at a 6.9-percent rate, nearly matching official performance numbers for the first half and government goals for this year.

The result topped forecasts of 6.7-6.8 percent from economists surveyed by news organizations, but the official GDP figure was the lowest since 2009.

Industrial output growth of 6.2 percent for the first nine months was down only slightly from the first-half mark of 6.3 percent. Retail sales growth of 10.5 percent for the period barely budged from the first-half level of 10.4 percent, according to the NBS.

The official GDP estimate may renew widespread doubts about NBS data after months of concerns that China’s economy has been slowing more significantly.

For over a year, President Xi Jinping and Premier Li Keqiang have asserted that China’s “new normal” growth of “about 7 percent” is more sustainable than the breakneck expansion rates of at least 8 percent in the past.

But far deeper drops in “surrogate” indicators like power consumption and rail freight have spurred suggestions that actual GDP growth has been far lower, a suspicion that has shaken stock markets around the world.

Confidence in NBS numbers has been further eroded by a series of the agency’s own reform efforts to curb data fraud by local officials seeking to advance their careers. How successful these have been is anyone’s guess.

“That China’s official economic data cannot be trusted is now received wisdom among western economists, investors and policymakers,” said a recent analysis by the London-based Financial Times, which found more reasons to believe the NBS than not.

Aside from arcane arguments about NBS “smoothing” of data, “convergence” adjustments and the transparency of “GDP deflators,” there are serious doubts about whether China has kept growing at even moderately high rates when its own official surveys show contraction in manufacturing month after month.

The questions have been compounded by low growth or declines in sectors that have paralleled GDP in the past.

Power consumption in the first three quarters edged up only 0.8 percent, according to the National Energy Administration (NEA), while rail tonnage plunged 10.9 percent through August, the National Development and Reform Commission (NDRC) has said.

Despite reports that the property market shows signs of rebounding, output of building materials have dropped over eight months with cement down 5 percent, flat glass down 8 percent and steel off 2 percent, the NDRC said.

While exports have declined 1.8 percent in the first three quarters, imports plunged 15.1 percent in yuan terms, reflecting low prices and weak demand, according to earlier customs figures.

Consumer price inflation tells the same weak demand story, averaging 1.4 percent so far this year. Producer prices have fallen for 43 months in a row, down 5.9 percent in September from a year earlier, the NBS said.

Actual GDP will be lower

In recent months, China experts and economists including Thomas Rawski of University of Pittsburgh, Gary Hufbauer of the Peterson Institute of International Economics and Derek Scissors of the American Enterprise Institute have told Radio Free Asia that actual GDP growth is more likely to be in the range of 4-5 percent.

“It’s consistent with maybe 4 percent at best,” Hufbauer said in August after the NEA reported that first-half total energy use rose only 0.7 percent.

Others, including Harvard University economists Dwight Perkins and Dale Jorgenson, argue that the doubts underestimate the impact of the rising service sector, which generated 49.5 percent of first-half GDP with far less energy than industry, again according to official data.

Over the first three quarters, the service sector share of GDP rose to 51.4 percent, the NBS said.

Last month in an interview, Perkins dismissed those who would lower GDP estimates due to “surrogate” indicators like energy and freight figures, saying they were “just wrong.”

“These people fade from the scene and their work is long forgotten,” he said.

In an email message this month, Yukon Huang, senior associate at the Carnegie Endowment for International Peace and former World Bank director for China, said there is “no close relationship” between GDP growth and power use or rail tonnage.

Power consumption is typically low during down cycles because of cutbacks in energy-intensive heavy industry, Huang argued.

“Since GDP growth these days is largely driven by services, … such indicators are meaningless,” he said.

In official figures for the third quarter, the service sector expanded at an 8.4-percent rate while manufacturing growth decelerated to 6 percent.

In a recent press conference for the National Bureau of Asian Research, Peterson Institute senior fellow and China economist Nicholas Lardy said energy and rail freight may have been valid indicators in the past, but no longer.

“I don’t defend the Chinese data to the last decimal point, but I am of the view that they’re growing in this neighborhood of 7 percent,” he said.

Lardy cited newer, less familiar indicators like a 50-percent jump in first-half box office receipts and a 15-percent increase in domestic tourism.

Such signs of growing consumerism are harder to find than the regular NBS reports on industrial output, said Lardy.

“We get almost no data like that for the service sector,” he said. “You have to scrounge around and find the data.”

Whether box office receipts are a better indicator than energy use remains to be seen, but both sides seem to see a need for verifying the official GDP claims.

Li Keqiang’s skepticism

One reason is the skepticism voiced by Li Keqiang himself in a now-famous leaked memo from 2007, when he served as Communist Party secretary of northern Liaoning province.

NBS data were “man-made” and “for reference only,” Li said. Instead, he relied on indicators like power consumption and rail freight, popularizing such surrogate measures as the “Li index.”

Despite the passage of time, Li’s criticism of NBS accounting has continued to weigh on its credibility, while on the flipside of the issue, world stock markets have wavered wildly with each NBS report, whether economists trust them or not.

Perceptions may sway economic activity as much as accuracy, as questions about China figured in the U.S. Federal Reserve Board’s decision to delay an expected increase in interest rates last month.

In a presentation on Sept. 30, NBS director Wang Baoan blamed anticipation of the Fed’s interest rate hike for capital outflows and depreciation of other Asian currencies, effectively strengthening the yuan and punishing China’s exports.

“The appreciation … has reduced the competitiveness of Chinese goods and is the main reason for the slump in Chinese exports,” Wang said.

Weak global demand is likely to be a greater cause for China’s export complaints, but the logical links suggest an echo effect for China stemming from GDP doubts.

The perceptions of China’s economy may also have strategic effects.

In an online broadcast by Yahoo Finance this month, a panel of experts discussed China’s challenges and bilateral relations with the United States.

“But with China’s economy in decline, the Sino-American rivalry may intensify as economic growth slows,” a summary by Yahoo Finance said.

So far, neither side in the debate over China’s official GDP estimates has argued that the economy is declining. The question is whether it is growing at moderately slower or much lower rates.

But markets and analysts may take exponential leaps from the uncertainties surrounding official GDP.

China’s official press has shown frustration with the GDP debate.

“The time has come for foreign entrepreneurs and analysts to cease pontificating over China’s GDP growth, and instead adapt to the slowing economy and embrace the business opportunities that it offers,” the official Xinhua news agency said in a commentary last month.