Those interested in whether China tells the truth about its economy should hold tightly to one fact: The State Statistical Bureau publishes what the Communist Party allows it to publish. That the entire government is a tool of the Party is the foundation of the People’s Republic of China’s (PRC) political system. The State Statistical Bureau in particular knows the score:
[T]he CPC Central Committee and the State Council committed to the general tone of progressing steadily, correctly handled the relationships among steady and comparatively rapid economic development, the adjustment of economic structures and the management of expectation on inflation, paid more attention to maintaining steady growth, carried out the proactive fiscal policy and prudent monetary policy, and made great efforts in policy presetting and fine tuning. As a result, the overall national economy realized steady development and grew at a moderate pace.
The ever-expanding debate over the PRC’s economic reporting thus often loses the forest for the trees. Chinese statistics are accurate when the Party is willing, and inaccurate when the Party is not willing. Other claims—for example, that electricity consumption is a reliable indicator of, well, anything—should be understood accordingly.
For the first half of this year, real gross domestic product (GDP) was said to rise 7.8 percent to $3.6 trillion. Chinese GDP growth is smoothed, because the Party likes stability. Growth was likely understated in 2010 and likely overstated in 2011. So far this year, it appears growth is overstated.
A smaller GDP deflator makes real GDP growth look larger. The first-half GDP deflator was 3.2 percent, versus consumer price inflation of 3.3 percent. A nice match, but in a stronger year in 2010, the GDP deflator was twice consumer inflation. There is typically a notable gap. This suggests the first-half GDP deflator is unusually small.
Narrow money (M1) growth was extremely slow. In the first half last year, real GDP rose 9.6 percent and M1 rose 13.1 percent, the standard gap in favor of M1. But this year M1 rose only 4.7 percent. GDP growth is on the low side of its range since the economy began weakening in 2007; M1 growth is far below its range.
There are competing explanations for both the deflator and M1, just as there are always competing explanations for Chinese figures. One explanation, though, is somewhat helpful.
The first-half trade surplus rose to $69 billion and net direct investment was still over $20 billion, totaling $90 billion coming into the country. Yet foreign exchange reserves barely budged. This could be due to portfolio shifts after dollar depreciation shifted to appreciation. If so, these portfolio shifts could also change the relationship between M1 and GDP.
If M1 instead means that reported GDP growth is too high, the drop in foreign reserves could be due largely to capital flight—money voting with its feet to leave a deceptively weak China. It’s not possible to be sure of either story, but the drop in reserves also at least partly explains the uncertainty.
After many years where reserves always grew powerfully, they stagnated in the second half of last year, rose again in the first quarter of this year, and now dropped. This fluctuation is a sea change for objective conditions and perceptions, one that has unavoidably sown confusion about the direction of the economy.
Consumption is a major component of GDP that is vital to rebalancing and therefore to the PRC’s long-term prosperity. As with its unemployment figures, the central government has acknowledged that retail sales are of limited use. Yet two weeks after each month ends, Beijing publishes retail sales as its consumption measure.
Retail sales can give an entirely distorted view. In the first quarter, for example, official outlets reported that auto sales fell and auto prices fell while the auto component of retail sales still climbed 11 percent.
More fundamentally, retail sales always outpace personal income. Yet personal savings never shrink. First-half personal income was said to grow 13.9 percent. Retail sales grew 14.4 percent. And personal savings grew 16.4 percent through May (latest available) and were mildly accelerating.
On official figures, getting ordinary people to stop saving and start spending is not a problem, because they save and spend faster than they earn almost every quarter. The main reason for this magical outcome is that retail sales are a terrible measure of actual spending.
The other component of rebalancing is investment. Two weeks after each month ends, Beijing reports urban fixed investment. Once a year, it reports a reasonable investment number that is far lower. For 2011, even that reasonable figure said investment reached 49.2 percent of GDP, the highest level ever recorded outside Soviet-style economies. Imbalances continued to worsen.
In the first half of 2012, urban fixed investment (which far outsizes rural) grew 20.4 percent while nominal GDP grew 11 percent. That suggests the investment share of GDP rose and perhaps passed 50 percent to reach yet another imbalance milestone. But we won’t see a reasonable number for the investment share of GDP for some time. That last part can be applied to a lot of Chinese economic results.
For more information, see “China’s Economic Data Are (Still) Not Credible”