China's Economic Growth Claims Lack Credibility

On April 16^th, the China National Bureau of Statistics (the “NBS”) announced with great fanfare that the Chinese economy was special because even in the face of an emerging global depression China was able to continue to grow at a rapid pace in the first quarter of 2008. According to Chinese officials, the headline Chinese first quarter 2009 growth rate was 6.1% which is an economic miracle given an estimated 25% fall off in exports, a drop in most industrial production numbers (including electric production) and what appears to be a collapse of the real estate sector (as evidenced by real estate deflation and high urban commercial real estate vacancy rates).

I was not surprised by Chinese officials saying things are OK in China. What surprises me, however, is the lack of critical analysis of the Chinese GDP numbers by Western economists and media. In the last two weeks most economists have accepted the first quarter 6.1% growth number as gospel and cite it as a reason that the global economy may recover.

Instead of being an economic problem, there is a growing consensus that China will be the economic engine that pulls the global economy out of its ditch. Goldman Sachs even raised their forecast for 2009 Chinese GDP growth from approximately 6% to 8.3% and seems to have applied for full membership Chinese Communist Party (”CCP”) membership by reciting the “party line” about how and why China is different from everyone else.

The problem is that Chinese GDP numbers don’t match the hype and when critically analyzed or compared to previous NBS statistics show some serious problems and inconsistencies.

Set forth below are some NBS statistics. It isn’t easy to get the data because the English NBS web site doesn’t include historical numbers that would allow a western researcher to easily reconcile their current growth claims.

• 9 month GDP for the period from January to September, 2008 - 20.16 trillion Yuan (see here)
• Full year 2008 GDP - 30.10 trillion Yuan (see here)
• First quarter 2009 GDP - 6.57 trillion Yuan (see here)

Based upon the above statistics, fourth quarter 2008 GDP was 9.91 trillion Yuan (calculated by subtracting 9 month GDP from full year GDP). But, first quarter GDP was 6.57 trillion Yuan which is a lot lower than the fourth quarter of 2008. It seems, based upon NBS numbers, that growth didn’t occur in 2009 even though they claim it did. The numbers obviously don’t reconcile, which is the point of my concern.

Chinese leaders are trying to avoid reporting that Chinese GDP is falling just like GDP in the rest of the world. They seem to be obfuscating this unfortunate fact with a barrage of inconsistently calculated and reported numbers. The industrial production numbers, export numbers, agricultural numbers and real estate data don’t add up to a growing economy. I estimate that domestic consumption would have had to grow by around 20% to produce 6.1% first quarter growth (not year on year growth but actual growth during the first quarter).

And, given rising unemployment caused by the Chinese export crash it isn’t likely that Chinese consumers are increasing spending like a bunch of drunken Americans.

Western press accounts are distorting the Chinese economic statistics. For example, in an article discussing how the newest Chinese GDP data was providing encouragement to economists, the Wall Street Journal reported that “growth in gross domestic product came in at just 6.1% in the first quarter; at best a wrong statement.

On April 16th the Wall Street Journal corrected its previous reporting error when it wrote,

Breaking down the GDP figures relative to the previous quarter…[is] how most developed economies report their economic data…China’s 6.1% figure for the first quarter of 2009, because it is a comparison only with the year-earlier period, doesn’t clearly show how the economy is doing relative to the onset of the crisis late last year.

The New York Times did a better job reporting Chinese GDP and Floyd Norris actually compared Chinese economic growth claims against Chinese electric production (a comparison I agree with) and questioned whether or not China’s GDP claims are true. Mr. Norris pointed out that electrical use in China was down for the first two months of 2009 by 9.2% which is inconsistent with any level of GDP growth.

As an aside, according to Chinese government sources subsequently stated electrical use rebounded in March but remained down 4% for the quarter which is a quarterly number that seems too good to be true after the first two months being down 9.2%.

While the New York Times more or less got the story right on Chinese GDP growth, most other media institutions, like the LA Times, misreported the data. And, no major media source has run a front page “above the fold” story on whether or not Chinese government data is misleading. Everyone is just more or less accepting what the CCP is dishing out.

I am pretty sure that by the end of 2009 Chinese official statistics will end up “proving” that the Chinese spirit is stronger than the rest of the world and that the economy grew at a rate close to 8%. After all, the Chinese leaders all but guaranteed continued economic growth at around 8% and they will deliver that number, no matter what it takes.

But, Western economists and media analysts need to be a little more careful about reporting Chinese “facts”. Otherwise Western policymakers and business leaders will make tragic Chinese policy errors based upon a bad understanding of the Chinese economy.

Comments

[CautiousInv...:]

In addition to growth inconsistencies noted by the author, there is a mounting fear that China is taking on unmanageable risks in stimulating its economy.

The fiscal stimulus plan is being accompanied by a state directive to increase lending and investment. And in a command economy, its pretty straightforward to expand lending and investment through state controlled enterprises.

The concern has to do with the investments and whether they add capacity where needed...........or whether they duplicate previous efforts and simply create excess capacity. A related, and equally serious, concern has to do with the quality of the loans being made and the prospect of high default rates.

While not the focus of global attention, many believe China has its own banking problems.

Apr 27 07:22 AM

[DY:]

I am living in Beijing and there is definitely no sign of a recession. Disposable spending is up 20% Y/Y in Beijing. I have to wait in line for 45 minutes to eat in local restaurants. The Western part of the country, where the Congqing, the world's largest city is located, is about the same.

Southern part of the country is hit harder. However, I was there last weekend and the factory that I visited said that they were back to full capacity.

I do not buy the governement figure either but I think this economy is stronger than what most people give it credit for.

Apr 27 09:41 AM

[jacago:]

6.1% is 1Q2009 over 1Q2008, not 4Q2008.

Apr 27 10:15 AM

[Alan Young:]

Good article. It's good to have a look under the headline number and dig into the methodology and context, so I commend the author for that.

Still, the inferences he makes go beyond the data, too. Keep in mind that China has a very substantial treasury surplus, which is extraordinarily useful in this recession for making long-term investments and providing economic stimulus. I would not be at all surprised if their economy does perform as advertised this year.

Apr 27 10:31 AM

[HaavBline:]

Exactly. One simple sentence prick this seemingly reasonable but very erroreous 'analysis'.

I am not arguing that China is not padding their numbers. They may. But if they did, it is not going to be this silly.


On Apr 27 10:15 AM jacago wrote:

> 6.1% is 1Q2009 over 1Q2008, not 4Q2008.

Apr 27 12:02 PM

[huangthomas:]

What a great selective observation! Go out to countryside and farm belt where 20-25 million unemployed migrant workers live. Go to Pearl river and Yangtze river triangles where export industries are located and see how many factories are closed or abandoned.


On Apr 27 09:41 AM DY wrote:

> I am living in Beijing and there is definitely no sign of a recession.
> Disposable spending is up 20% Y/Y in Beijing. I have to wait in line
> for 45 minutes to eat in local restaurants. The Western part of the
> country, where the Congqing, the world's largest city is located,
> is about the same.
>
> Southern part of the country is hit harder. However, I was there
> last weekend and the factory that I visited said that they were back
> to full capacity.
>
> I do not buy the governement figure either but I think this economy
> is stronger than what most people give it credit for.

Apr 27 12:04 PM

[Raider1001:]

The Chinese first quarter growth for 2008 is 6.1491 trillion yuan, the Chinese first quarter growth for 2009 is 6.5745 trillion yuan. The 6.1% growth claim, if one reads the footnote on the table, is right.

"China’s 6.1% figure for the first quarter of 2009, because it is a comparison only with the year-earlier period."

By reading the Chinese statistics, it looks like they been doing this for decades, and media just take the data for granted.

BTW, I believe the Spring Festivial holiday would last a month in China, would that affect economic performance for Chinese economy for Q1?

Apr 27 12:49 PM

[Dustinian:]

Obviously the CCP's statements should never be taken at face value. You are right in your dismay at the lack of objective and skeptical coverage in the media, but then again the majority of those in the media aren't exactly the most intelligent individuals.

Another reason why many seem to buy the CCP statements is because it is what people want to hear. However bad first quarter growth was, I still see around 7 percent growth for the Chinese economy this year as the following quarters will be vastly improved.

Apr 27 01:31 PM

[DY:]

Agree it is selective observation because it was meant to be a personal observation.

This is going to sound insenstive, however, the personal income per capital in Beijing is $9000 USD. The increase in that this year will be roughly $1000 USD which is about what a displaced migrant worker makes in a year. Considering there are 16M+ people in Beijing, it's a wash in terms of Beijing income gain and migrant worker loss.

Yes, a lot of factories are closed. However, the one that I visited has zero (yes, 0) sales in Jan. and Feb., and now they are back to 100% capacity. This is a $70M USD factory (annual sales). And it is in Hangzhou. What I am trying to say is that some things are moving. And you are probably right, a lot are out of business but I think that's opportunity for the survivors.


On Apr 27 12:04 PM huangthomas wrote:

> What a great selective observation! Go out to countryside and farm
> belt where 20-25 million unemployed migrant workers live. Go to Pearl
> river and Yangtze river triangles where export industries are located
> and see how many factories are closed or abandoned.

Apr 28 03:57 PM