N.O SOPHISTICATED ANALYSIS is needed to show that China is in better economic shape than most other countries today. Just check out the busy shopping malls, the congested streets in rush hour, and the bullied tourist attractions on vacation. But if the crowd scenes are enough to confirm that China is doing well, it will take a little more work to answer the question: Exactly how well? As is often the case with Chinese data, the answer is debatable.
The national statistical office will report the third quarter GDP on the 19th of October. Analysts expect about 5% year-over-year growth, a strong rebound from the depths of the coronavirus slowdown, and all the more amazing when much of the world is in recession. However, some believe official growth data this year has been too rosy, not least because China’s first-quarter pandemic lockdown was among the most restrictive in the world.
Fortunately, the secrets are not unfathomable. The research published in the past few weeks sheds light on what is really going on. Doubts about China’s data are not new: it is probably fair to say that few serious economists trust the exact growth numbers. Instead there are two large camps. You think official data is too slick, but the general picture isn’t too misleading because the government sometimes exaggerates GDP and at other times it lowballs. The second camp envisages unilateral manipulation, with China’s coffins steadily increasing the size of the economy. The new research comes from both camps.
Start with the more skeptical of the two, best demonstrated in a note from Capital Economics, a consulting firm, in September. Julian Evans-Pritchard and Mark Williams, his analysts, argued that Chinese data has looked particularly lazy since 2012. Before that, growth consistently far exceeded targets. Reported since then GDP was kept in line with the objectives set at the beginning of the year. And statisticians have stopped heavily revising their original estimates. It all seems a little too perfect.
Other dates look more believable. While real growth (ie adjusted for inflation) was unlikely to be smooth, nominal growth was volatile. In addition, certain elements of the real growth calculations appear to have been raised. The building component of GDP moved in parallel to cement production. However, from 2014 to 2018 a large void opened as construction progressed. In the first quarter of this year, when China was partially locked, the transportation component was from GDP was resilient – despite a breakdown in freight and passenger traffic.
Therefore, Capital Economics developed a “China Activity Proxy” to measure growth. There is a long history of analysts using alternative sources to measure the Chinese economy. No less an authority than Li Keqiang, now Prime Minister, did so famously when he ran a northeastern province. In their most recent proxy, Messrs. Evans-Pritchard and Williams include eight indicators, from property sales to seaport freight. The results are strong. While officially GDP They grew 48% cumulatively from 2014 to 2019 and estimated the true expansion at 33%.
China’s coffins can turn to an unlikely corner for partial defense: America’s Federal Reserve. San Francisco Fed economists John Fernald, Eric Hsu and Mark Spiegel have also created a proxy for Chinese growth set out in an upcoming paper that uses indicators such as consumer expectations and property, plant and equipment investments. They too come to the conclusion that official growth has been implausibly smooth since 2013. However, you find that the actual growth was faster and the other half slower about half the time (see graph).
The crucial test of these proxies is whether they provide insights into China’s trajectory that the official lacks GDP Data. Both pass the test. The ups and downs of its measures explain China’s periodic changes in fiscal and monetary policy better than the eerily stable path of the official real GDP does. The Fed economists are subjecting their vicar to yet another test designed to match Chinese imports as measured by trading partners’ reported exports – in other words, a data source completely devoid of potential Chinese violins. In countries with reliable statistics, import growth tends to move closely with that of GDP. This is the case with your proxy – but not with civil servants GDP.
Does this mean that Chinese data is bluntly rubbish? No. The Fed economists note that Chinese statistics, with the exception of Real GDPhave become more reliable over time. Capital Economics analysts conclude that the main problem is converting nominal numbers into real numbers. Statisticians seem to be using inflation rates that are too low in calculating real growth for the government to achieve its goals. Nominal measurements are more trustworthy, and this is important when trying to evaluate China’s debt burden or the size of its economy relative to America’s, for example.
Unfortunately, this year proxies offer slightly different reports on China’s economy. Capital believes the first quarter slowdown was much sharper than reported, while Fed calculations suggest it was milder. However, both agree on the most important point: the upswing has been great since then. The crowded streets and bustling shops don’t lie. ■
This article appeared in the Finance & Economics section of the print edition under the heading “The Real Deal”.