China announced its official economic results for the second quarter today, kicking off the standard discussion of how well the country is doing. It is worth a reminder that many of the numbers and most of the talk are nonsense.
In the first quarter, the State Statistical Bureau (SSB) reported 7.4% GDP growth, setting off a furor of commentary about hard landings and the like. For the second quarter, it reported 7.5% GDP growth, supposedly an improvement. Small problem: Chinese GDP estimates aren’t anything close to accurate enough to distinguish between the two results.
Perhaps true GDP growth was below 5% in the first quarter and the second quarter was much better. According to the SSB, however, China never suffers sharp GDP downturns. So it can never recover from anything.
Also according to the SSB, inflation is suspiciously smooth. Inflation and GDP come together in the GDP deflator, the difference between arithmetic change in GDP and announced “real” growth. The arithmetic increase in first-half GDP was 8.5%, giving a deflator of 1.1%. Reported consumer inflation was 2.3%. This isn’t a large difference but it does point to deflationary pressure, especially when combined with 28 months of contraction in the producer price index.
There are better economic measures than GDP, which is particularly artificial with a large state sector engaged in low value-added transactions. In China’s case, though, other indicators are even more difficult to credit. The central government refuses to publish meaningful unemployment numbers. The supposed link between 8% GDP growth and needed job creation never made any sense and the current situation seems at least tolerable. But government figures are no help in assessing this.
False export invoicing has become an issue in the past few years but is largely due to smuggling money past capital controls and thus traces back much longer. So it’s hard to know what to make of nearly flat exports to date in 2014. An apparently stable situation could be very good or very bad, depending on whether there was more lying this year or last.
The consistency of the industrial production series was so low it was converted into an unverifiable index. A blatant example concerns non-performing loans (NPL). There is completely justified skepticism of claims of very low NPL levels but it is often kept deliberately vague, because NPL’s are treated by Beijing as highly sensitive.
Fixed asset investment is China’s benchmark figure. In 2002, it was close in value to global benchmark gross fixed capital formation. In 2013, the gap between them was about $2.7 trillion. China reports gross fixed capital formation once a year with a long delay, suited to the amount of time it takes to measure. Just two weeks after the end of every month, fixed investment is dutifully announced. In the first half of this year, fixed investment stood at almost $3.4 trillion. This number is massively inflated compared to investment measures everywhere else and best ignored.
There is a good case to be made that most Chinese government statistics should be ignored. How, then, to know the true direction of the economy? By policy action. Premier Li Keqiang said 16 months ago reform had to be so stringent, it would be like “cutting the wrist.” Eight months later, Communist Party General Secretary Xi Jinping said unprecedented reform was needed.
Since then, there has been more talk but little decisive action. China continues to deplete its natural resource base, see its labor force age and very possibly shrink, run up huge domestic debts, and inhibit competition for the sake of public sector dominance.
As a result, the economy is still heading for that infamous hard landing (actually, stagnation before the end of the decade). A true recovery will come not via SSB decree but from implementation of the promised deep reforms: enhanced individual land rights in rural areas, an integrated national labor market, private banks, and a smaller state sector. This is what to watch for.
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