Posted By Neelam Mathews
Jan 17, 2012
By- Derek Scissors, Ph.D. is Research Fellow in Asia Economic Policy in the Asian Studies Center at The Heritage Foundation.
China today announced that GDP growth for 2011 slowed to 9.2 percent. Over the next days and weeks, there will be a stream of pontificating about what this means. There’s a good chance that everyone involved will be pontificating about nonsense.
China’s economic statistics are usually inconsistent, occasionally wildly inconsistent, and do not seem to be improving in quality. For 2011 GDP in particular, Beijing is very likely exaggerating growth (some years it understates). Rather than focusing on reported figures, the U.S. should prepare for a weak Chinese economy but one that may begin to rebalance in 2012. It should also engage in long-overdue independent estimation of China’s performance.
Impeaching The Growth Result
There is a cottage industry that gains directly or indirectly from insisting that Chinese numbers are fairly accurate and far better than the bad old days of 15 years ago. But reasons for skepticism abound.
There are indirect indicators of much slower GDP. Monetary policy has long been extremely loose, featuring negative real interest rates. Yet the central government began loosening further several months ago, a strange reaction to growth still over 9 percent. China still boasts the world’s largest foreign trade surplus and net inward investment. Foreign exchange reserves fell in the fourth quarter, suggesting capital flight. That would translate to a sluggish world economy being more attractive than China’s own.
Problems go well beyond 2011 GDP. It has been over a decade since former Premier Zhu Rongji wondered how all provinces could grow faster than the country as a whole. The problem persists and, in fact, was worse in 2011 than 2008. The trends in national and provincial growth clearly match, but provinces remain unwilling to report accurate numbers. Such unwillingness extends deeply into Chinese statistics.
Li Keqiang, himself set to become premier in 2012, once dismissed GDP figures as “man-made.” A serial revision process was intended to improve that data quality. There has never been a downward GDP revision, though, which indicates more unwillingness to report certain results. Further, only some data are revised, creating a mismatch between revised and unrevised elements. The revision process is indeed man-made and may have worsened data quality.
Some Chinese figures are so absurd they do not require a premier to doubt them. There is no pretense of a true unemployment rate, instead only “registered urban unemployed,” a number not allowed to exceed 5 percent. It is considered too dangerous to announce true urban joblessness, much less the far higher rural number.
It should be emphasized that many problems in Chinese data are due to foreign observers. The Ministry of Commerce identifies Hong Kong as the source of 60 percent of incoming foreign direct investment (FDI) in 2011, soaring from an already substantial 35 percent in 2007. Calling investment from Hong Kong “foreign” strains credulity, especially with so many mainland subsidiaries that are listed in Hong Kong and sending money back. Yet it is duly repeated that FDI is rising.
Not Rebalancing Yet
The flaws in Chinese data have serious consequences. The imbalance between consumption and investment has become a critical force in the world economy, but data issues cloud the extent and trend.
Challenges for the U.S.
China’s macroeconomic and data issues present varying challenges to the U.S. First, the U.S. should stop relying on numbers deemed absurd by the most senior officials of the government producing them. Second, it is possible that Chinese rebalancing may actually begin in 2012—if more by default than by some dramatic central government program.
The U.S. should therefore:
- Create a project, led by the Department of Commerce, to compile American estimates of important Chinese economic indicators: GDP, unemployment, inflation, investment, consumption, and so on. This project is long overdue.
- During Vice President Xi Jinping’s anticipated February visit and the spring Strategic and Economic Dialogue, encourage the Chinese government not to fight rebalancing.
The U.S. Can Help
One way the U.S. could facilitate Chinese rebalancing is by its own rebalancing -- cutting the budget deficit. Apparently this is too much to ask, so the U.S. can publicly tie progress in Chinese rebalancing to an American commitment to forgo trade sanctions for a given period. This would be especially helpful in the politically dangerous year ahead.