Want to Understand How China is Doing? Don't Look at GDP
Why the classic benchmark statistic is unsuitable to describing the world's second-largest economy.
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For over a quarter century, the one figure that dominated discussion of China's economy was this: eight percent. Beginning in 1982, when leader Deng Xiaoping established the percentage as necessary to quadruple the size of the country's GDP by 2000, China has seldom failed to achieve it—even in 2009, when the world was enduring the worst downturn since the Great Depression. The eight-percent figure became so entrenched that it acquired an almost Talmudic significance, causing speculation that if the economy didn't grow by that amount, social instability would surely follow. (The fact that the number eight is considered lucky in Chinese culture only added to the mystique.)
These days are now over. China's GDP has failed to reach the benchmark for six successive quarters, checking in at 7.5 percent for the second quarter of 2013. Though this growth is still robust by global standards, the sub-eight percent figure has raised concerns that a Chinese “slowdown” is now permanent—and will have serious consequences for the rest of the world.
The death of the eight-percent benchmark does however give us an opportunity to re-examine GDP and the assumption that, if China achieved a certain percentage, the Communist Party was succeeding. Whether or not China achieves seven, six, or five percent growth in the coming years—as economists like Michael Pettis have asked—do measurements of the country's GDP even matter? Here are a few of the issues involved in assessing the health of China's economy.
China's official GDP numbers may not be very accurate
Interpreting what China's GDP numbers mean is difficult enough in the best of times—but what if the numbers themselves aren't reliable? Although the veracity of Chinese economic data is a subject of debate, critics of the data have two basic concerns:
The first is transparency—the Chinese Communist Party has historically been cagey with its methodology, and the speed with which it releases quarterly GDP percentages puts the numbers' accuracy into question. According to Leland Miller, CEO of China Beige Book, a company which compiles reports on China's economy based on surveys of businesses within the country, quarterly GDP figures are released just 12 days after the quarter ends—and leaked after nine. By contrast, the United States requires four weeks to release data, and Hong Kong—a comparatively tiny economy—needs six. The fact that an economy the size of China's can compile this information so quickly has led observers to question the accuracy of the data.
Secondly, national-level data in China doesn't always match information provided by provincial and municipal-level governments, occasionally producing a difference of 10 percent. One reason is politics. During China's reform and opening era, lower-level officials have been judged by their ability to produce economic growth, providing an incentive for leaders to overreport GDP. An additional problem, according to Beibei Bao, who analyzes China's economy for the Rhodium Group, a New York-based consultancy, provincial-level economic statistical bureaus were often understaffed.
Not everyone, however, agrees that these statistics are so inaccurate. In a newsletter from earlier this year, the San Francisco Fed argued that China's GDP data is basically reliable. a claim backed up by Nicholas Lardy, a China specialist at the Peterson Institute of International Economics. Lardy told me that in recent years, Beijing has taken
steps to centralize data collection, relying less on under-staffed (and possibly corruptible) local and provincial bureaus. As a result, Chinese numbers have become increasingly reliable.
GDP isn't the most useful measurement for an economy's health, anyway
Six years ago, then-Prime Minister Wen Jiabao famously called the Chinese economy “unbalanced, uncoordinated, and unsustainable,” revealing Beijing's unease with its then-breakneck pace of growth. Wen's concern reflected a growing consensus that China's economy relied too heavily on investment (for which returns tend to decline over time), and exports (which depend too much on the health of the global economy), and not enough on consumption. For example, if a local government authorizes the construction of a factory, GDP will go up—even if nobody ultimately uses it to make things. As a result, Leland Miller says that the GDP statistic indicates the economy's growth rather than productivity, making it functionally “useless” as measurement in and of itself.
Beijing wants to change this equation, rebalancing China's economy toward one based more around consumption than investment (as well as one based more on services than manufacturing). But this isn't a change that will occur overnight, and China remains a place where its robust GDP masks major structural weaknesses in the economy, rendering the figure meaningless—at best.
If GDP isn't useful, how about unemployment?
In the United States, unemployment figures are considered such an important measure that, until recently, conventional wisdom dictated that a president could not be re-elected if unemployment remained above a certain percentage.
But in China, official unemployment numbers are, as Beibei Bao said, “garbage.” That's because they fail to account for the more than hundred million strong army of migrant workers, men and women who leave their hometowns to work, illegally, in the cities. Because they lack official permission to live outside of their place of registration, migrant workers do not count in official employment statistics—even though urban unemployment is viewed as a potential source of political instability.
So- what measurements can we use?
In 2007 Li Keqiang, currently China's prime minister, remarked at a private dinner that China's GDP was “man-made” and that, instead, he relied on three other measurements: electricity consumption, rail freight, and bank loans. Before long, Li's comments—published in a WikiLeaks cable in 2010 — emerged as an alternative measurement to Chinese economic data. Though imperfect—Lardy says that electricity consumption doesn't always reliably track growth—Li Keqiang's “index” at least relies on data free from political manipulation.
But while economists and investors now have more accurate and useful data at their fingertips, it's worth considering just how useful national-level data is as a whole. As Leland Miller says, “China isn't just China. It's a bunch of little China's.” A large, fragmented country with enormous economic diversity, it is difficult to draw conclusions about China's economy as a whole without considering the impact on its component parts. In recognition of this, Miller's China Beige Book targets relevant sectors, regions, and industries in order to develop a more accurate impression of what really drives China's growth.
At some point in the next five years, China's GDP will eclipse the United States' and become the world's largest, an event that will attract a lot of attention—and hand-wringing— from journalists and politicians. But for anyone who wants to understand China's future, the figure will be completely useless.Source: www.theatlantic.com