July 22, 2005

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Deconstructing China's growth

One of my hobby horses has been China's economy, and in particular the unreliable statistics used to steer the ship. I've created a China economy category to group together these posts*.

Jake van der Kamp again finds China's latest GDP doesn't add up:

I have a problem with simple things like one plus one equals two when it comes to figures put out by the National Bureau of Statistics. It seems they have an entirely different sort of calculator at work in Beijing. Take the latest announcement that economic growth in the second quarter was 9.5 per cent year on year. It was a bit higher than was entirely welcome, but growth is growth and this certainly looks like a good growth number.

Just for starters, however, we were also told that the growth rate of investment in fixed assets was 25.4 per cent year over year, definitely well above the latest cool-down target of 16 per cent. Our difficulty here is that the fixed asset figure is in nominal terms while the figure for gross domestic product is in real (inflation-adjusted) terms. But it can be resolved. We also have a price index for fixed asset investment and a little spreadsheet work serves to put the numbers on the same basis. This then allows us to take the fixed asset figures out of the total and calculate how strongly the rest of the mainland's economy is growing.

Take note that it is no trivial exercise. Fixed asset investment absorbs an astronomical 53 per cent of the mainland's GDP, a figure rarely to be found elsewhere on this planet. The first chart [below the jump] shows you the result of the exercise, done on a four-quarter average basis here to smooth out the usual volatility of mainland statistics. That stated growth rate of 9.5 per cent drops to a minute 0.06 per cent, effectively zero. If these fixed asset figures are right, then the rest of the mainland's economy is not growing at all.

It gets worse. Another component of GDP is the balance in foreign trade. The second chart shows you that for the 12 months to June, this amounted to a surplus of 657 billion yuan, or 4.5 per cent of GDP. Almost all of it materialised over the past 12 months. In June last year, the surplus amounted to less than 1 per cent of GDP.

Unfortunately, I cannot calculate an inflation-adjusted figure for the surplus. The numbers simply are not there and thus I cannot give you a third line on that first chart to show what the growth of the rest of the economy would be if you took the trade figures out of GDP as well. Rest assured, however, that you would get a negative growth figure if it could be done. Even taking the conservative tack, that figure would be at least minus 4 per cent. Aside from fixed asset investment and trade, the mainland's economy is contracting, not growing.

And then we get even more of a puzzle. We are also told that consumption, another component of GDP, registered strong growth of 13.2 per cent. How is this possible? By the time you have taken out fixed assets, trade and consumption, you have very little of GDP remaining. If they are all growing by more than 9.5 per cent, what is left to pull the overall figure back down to 9.5 per cent?

Well, let us say the consumption figure refers only to personal consumption expenditure and not to government consumption. No luck again. Government expenditure for the 12 months to June was up 16.2 per cent year on year. I shall grant you that these government figures are nominal rather than inflation-adjusted and also comprise some fixed asset investment, but, even if appropriate adjustments could be made, there is no way they would yield the big minus figure we now need.

The only thing left is inventory adjustments and I am fully prepared to believe that there was massive destocking over the past six months. We are talking, however, of the very smallest component of GDP, a bare 0.33 per cent of the total last year. No, this also will not give us what we need.

What we actually need is one of the special calculators they use in Beijing. Without one of these to help us, the economic growth figures just come out as nonsense.

Perhaps they are.

Funnily enough, the SCMP also reports the vey same statistics bureau is making policy suggestions and a startling admission:
The central government has been advised by the National Bureau of Statistics against introducing further economic tightening measures despite unexpectedly rapid growth so far this year. Despite reporting higher-than-expected gross domestic product growth of 9.5 per cent in the first six months of the year, a government economist said the bureau was predicting that the economy would slow.

The economist said nominal GDP growth, a figure not revealed to the public, was a more reliable indicator than the real-growth figure in the report, which the bureau adjusted for inflation and other factors. Nominal GDP growth had slowed markedly during the past few quarters, despite real GDP growth remaining relatively constant at close to 9.5 per cent.
Nominal GDP growth is a state secret! Why? It can be inferred using a combination of the real GDP and inflation numbers. Except as we've often proved before, these numbers are rubbish. Perhaps revealing nominal GDP would give away the real game? We couldn't have that.

You wouldn't even need a special Beijing calculator.


Related posts

- Invented the Abacus but can't add up
- Who to Believe
Lowering the sites
- The numbers game
- Not adding up
- Seeing is not believing

* It's also because I'm sick of searching for them, seeing I often refer back to previous posts. Here's a handy tip for new bloggers: always use categories.

posted by Simon on 07.22.05 at 11:49 AM in the China economy category.


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More fun with the meaningless statistics pumped out by the NBS and then quoted ad infinitum by those with an investment to sell in China, try looking at FDI in China over 2004-5 and reconciling the claimed 3.2 percent fall y-o-y in first half 2005 to USD28.6 billion when a look back in time shows that the same officials claimed first half 2004 FDI was USD33.9 billion. Using my (non-Chinese) calculator, that should mean that FDI fell in 2005 by 15% y-o-y. Quite frankly, Chinese economic statistics are not worth the paper they are written on.

posted by: dylan on 07.22.05 at 12:01 PM [permalink]

Even if that paper is worth 2.1% more today than yesterday.

posted by: Simon on 07.22.05 at 03:58 PM [permalink]

An adjusted 9.5% is a relatively more trustable number than other norminal numbers, I believe. As the head of NBS pointed out a long time ago, nominal number is not just the combination of real GDP and inflation as you have learned in the textbook, but the combination of the former 2 factors plus bluffing number by whoever would benefit from. Among them, fixed asset investment is most unreliable one.(as you know why)
I am not sure why you are still so surprised by the "chinese calculator". NBS's admitted using "it" a long time ago because nominal numbers got to much "water" inside. The calculator is for squeezing out the "water", that's all.
dylan, don't believe FDI too much either, because it's also a political acheivement of certain officals in China. Probably last year, the bluffing was considered relatively safe than this year.

posted by: lin on 07.23.05 at 12:56 PM [permalink]

Remeber, 40% (an almost unreal figure) of china's economy/output dependson FDI. One thing china is very wary of is gving the world any kind of news that would stop this money flowing in.

Re dylan's above comment. I've heard those same statistics and agree.

posted by: Martyn on 07.24.05 at 07:28 PM [permalink]

Easy - the counterbalancing negative plug for GDP is the new loans going bad at the "banks" and the corrupt money being whisked off to far-away places on behalf of Party members. Once you subtract those state secrets, it probably balances out just fine.

posted by: A.West on 07.27.05 at 01:02 PM [permalink]

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