We all know that China’s published GDP figures are meaningless. China’s premier, Li Keqiang, has told us so. And common sense tells us that no country, large or small, can possibly produce accurate GDP data within 2 weeks of the end of a quarter. Nor is it possible to believe that this data never needs to be revised, but is always ‘right first time’.
Yet China’s GDP numbers are published just 2 weeks after each quarter, and are never updated.
Of course, one key reason people still use these numbers is simple. There has been little else available. Thus the blog is very enthusiastic about the above chart, from veteran China expert and metals analyst, Simon Hunt:
- It begins in 1991 and focuses on the 2 key variables – nominal GDP (dotted blue line) and GDP deflator (red)
- Nominal GDP is total output before adjusting for inflation, and the GDP deflator then adjusts for inflation
The picture that it gives of real GDP (green) fits very well with the blog’s own personal knowledge of China’s economic development over the period. It shows the major downturn in 1993 and the slowdown at the end of the decade, plus the later downturn in 2008-9.
It also destroys the myth that China’s growth has somehow been in double digits through all the difficulties of the Asian Crisis and more recent crises, until very recently.
It also explains why state media were happy to publish the above map last month, showing large parts of the country coloured dark blue, to “indicate a serious economic cooling-off“.
Noteworthy also is that almost all of the rest of the country was described as being in a “downward trend” (light blue)..
If the new leadership really believed its GDP number, it clearly wouldn’t publish a map like this. Instead, we can simply assume that they inherited a GDP process which they knew to be wrong, but which would cause too many problems to correct. So the best solution was simply to ignore it.
This approach means they can focus on what really matters, getting the future direction right, and implementing the necessary policies. This will be quite different from the previous focus on creating a property ‘wealth effect’ and boosting exports. As China Daily commented on Li’s visit to Central China’s Hunan province:
“Experts said his choice of a destination reveals the answer. The potential resilience of China’s economy lies not on the coastline but more in the central area of the country, where urbanization is just getting started, the infrastructure needs upgrading, and robust growth is expected.”
And it went on to note that “the old industrial bases are finding their restructuring to be a challenging task”.
GDP growth of around 5% a year for the past couple of years is a far more believable level than the published figures. It also relates very well to Li’s suggestion that data such as electricity consumption was a better guide to the reality of economic growth.
In turn, of course, it means it is much more likely that China will now see a period of negative growth, as it bursts the property bubble and tackles widespread corruption.
But at the same time, it will be building for the future, particularly through the development of the new rail and maritime ‘Silk Roads’ that aim to connect Europe and Asia with China.
Even more importantly, it makes it much less likely that China will do the massive stimulus that outside ‘experts’ expect. If China has survived economic downturns before in the past 25 years, rational leaders such as President Xi and Premier Li will assume that it can survive another one today.
But companies and investors who haven’t planned ahead for this Scenario may find life very difficult indeed.