China’s GDP over the past four years is far too steady when compared with other economies according to economic and policy research firm Rhodium Group.
In a note entitled China’s GDP: The Costs of Omertà, the research group argues that “China’s GDP data have been too smooth to be realistic over the past four years while the available benign explanations for the data are unpersuasive”.
In terms of immediate evidence, it points out that “a funny thing” happened over the past winter and spring. China’s economy moved from a point approaching crisis to a modest cyclical recovery. But it says China’s economic data didn’t move.
GDP growth was 6.4% year-on-year in Q4 2018. It then posted 6.4% y/y GDP growth in Q1 2019, and only slowed to 6.2% in the second quarter of this year.
Over the past sixteen quarters, China’s headline GDP has only varied by 0.8 percentage points in total, within the range of 6.2% and 7.0%.
The consultancy points out that no other country had such a stable record of economic performance over any four year period as illustrated and undelines the point with the following graph.
There is an argument that China increases the figures a little when they are lower and eases them down when higher. Others suggest that local government submissions may be distorted and overstate growth.
Rhodium adds that the raw output data reflected in the Rhodium China Activity Tracker – a weighted average of official industrial output statistics – show a much more cyclical pattern than revealed in headline data shown below.
Rhodium also suggests that Chinese growing services sector, which some believe could actually smooth the figures, is actually more volatile than other sectors so it would not smooth the picture.
The note warns that the extent of any overstatement of GDP is vitally important to the global economy, given that China is the second largest economy in the world.
It says the public debate should now shift toward a more realistic argument about how significant or meaningful the distortions in China’s GDP might be, and what implications those should have for our understanding of China’s economy and the global economy.
Implications for global growth calculations
For the world, it may mean the global GDP and the growth of emerging markets versus developed markets is potentially miscalculated.
The note says: “The most obvious cost to the rest of the world in dealing with distortions in China’s GDP data occurs in making realistic projections of global growth and China’s impact on the global economy. This is the key dilemma for policy-makers within countries that are China’s trading partners. Put simply, according to IMF data, China has been responsible for around 39% of global GDP growth between 2010 and 2018, and around two-thirds of the growth in emerging markets over that time.
“The total growth in China’s economy has almost matched the total growth in all advanced economies over the same timeframe. If China’s data has been distorted meaningfully, then the growth of the global economy and growth of all emerging markets relative to developed markets has also been distorted.”
It notes that while there have always been issues with GDP, attempts to question the figures or find and analyse other sources of data can be regarded as an external attack by the Chinese Communist Party with China demanding Omertà or silence internally and where it can externally.
It has domestic implications as well. The consultancy warns that an internally communicated impression of a smooth economic trajectory can also lead to mistakes in fiscal and monetary policies.
Risk to China achieving developed market status
The note adds that there are other implications for China in terms of international views about its stability, the possible date when it becomes the world’s leading economy and important measures such as debt to GDP ratios.
It is also concerned that the credibility of the statistics could contribute to whether China is eventually regarded as an emerging or developed economy.
“If China’s GDP is believed to be overreported, then China’s debt burden will consequently be perceived as higher as a proportion of the economy and less sustainable over time. Banking system assets are already 310.5% of China’s 2018 GDP. If GDP is overstated by even 10% then this metric would be closer to 345%, and annual interest payments on credit would approach 16-17% of GDP.
“Should markets discount China’s GDP data, they will also be less willing to deploy capital within the Chinese financial system over time.”
Rhodium says the emerging market versus developed market issue is very important given China’s recent inclusion in global bond indices. In an emerging market economy, a sudden slowdown in growth is likely a reason to grow concerned about financial stability: capital outflows may result, bond yields will rise, and currencies are likely to weaken while balance of payments pressures are likely to result.
In developed economies, however, a slowdown in growth is likely more positive for bond prices, as there is less concern about the instability created by capital outflows.
Call to revise GDP back as far as 2014
The note adds: “We would offer Chinese policymakers a modest proposal to address some of these threats to credibility in published GDP growth rates: change the past, for the sake of the future.
“We would suggest the National Bureau of Statistics make a highly public announcement of a revision of GDP levels and growth rates from 2014 to 2018, reducing GDP growth rates in 2014 and 2015, revising 2016 and 2017 rates slightly higher, and reducing the 2018 growth rate and producing a correspondingly lower level of nominal GDP.”