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29 March 2008 On the Road from Samaria When they manipulated the stock market, I remained silent; I was making money and felt superior to the crowd. When they silenced their critics, I remained silent; I was self-righteous and felt they got what they deserved. When they came for the blue... More
  • China’s Magic Numbers 0 comments
    Jul 18, 2009 8:43 AM
    China’s Magic Numbers
    Is the republic really growing at 8 percent a year?
    By April Rabkin
    Posted Friday, July 17, 2009 - 1:42pm 

    BEIJING-China, on Thursday, announced its second-quarter gross domestic product-a big deal here. It's not just the Chinese government's top priority but a nearly sacrosanct number. Growth came in at an astounding 7.9 percent. But could China's GDP really grow that fast even with the collapse of global trade?

    Economists at top brokerages and investment banks say yes. Debate raged a decade ago over whether or not to trust the data or how much officials at various layers were fudging the numbers. But now the question is mostly forgotten because alternative data is so hard to come by. Some independent economists and academics still have lingering doubts, however.

    The concept of GDP isn't native to China; officials refer to it, more often than not, by those three letters rather than their Chinese translation. But like Communism, the imported ideology that reigned before it, no other country has revered the economic indicator on such a massive scale. The fixation with semi-scientific numbers hearkens back to Maoist days, when surreal statistics for steel and grain production took center stage. Nowadays, boosting the GDP seems to be just about the highest form of public service. Premier Wen Jiabao said in March, "An 8 percent GDP expansion is the government's pledge and responsibility." At nearly every level of the bureaucracy, officials tally GDP growth of their district and report it up the line. By county, city, and province, their bonuses and promotions have been largely based on two factors: local GDP growth and the rate of compliance with the one-child policy. The latter has in recent years dropped out of the equation, giving officials plenty of motivation to fiddle with the data.

    Analysts in certain years actually suspected more underreporting than overreporting, and data collection probably still skips over some private-sector growth. But today disbelief centers on how GDP growth could be so robust amid deflation, falling foreign-direct investment, collapsing trade, plunging corporate profits, and, most notably, waning electricity usage. China is probably the only country in the world to ever report positive GDP growth and shrinking power consumption at the same time.

    On the other hand, common knowledge erroneously has it that exports are the main driver of China's GDP growth, especially since Treasury Secretary Timothy Geithner accused Beijing of brutally suppressing the renminbi, the people's currency. The fact is, exports have never accounted for more than a third, some put it at a tenth. The greater contributor by far has been domestically funded fixed-asset investment-including glittering, empty skyscrapers, parallel superhighways, and even plans to build two high-speed trains, both running between Hangzhou and Shanghai. That factor has been even more magnified this year by China's $586 billion stimulus package targeting infrastructure.

    After giving up on debating GDP accounting methods, critics turned their attention to the quality of growth, which even Communist Party officials have clamored to condemn as unsustainable and hazardously driven by government spending rather than domestic consumption. There's a widespread perception abroad that China is a capitalist paradise. But half of China's GDP comes from government investment and expenditure, making its public sector, by some estimates, proportionately twice as big as India's and those of most emerging markets-and still growing. This is a problem because returns on capital use by state-owned firms are far poorer than by private firms. A boost to the GDP may simply not translate into real economic growth. The government stimulus has also prodded banks to release a tidal wave of credit, less than 5 percent of which has gone to small and midsize enterprises. Hogging the bank loans, state-backed firms now have enough funds to eat up their private competitors, though the private sector remains the country's major source of employment.

    Speaking of which, unemployment data in China is sorely lacking and, as a result, largely ignored by most investors and economists. Since GDP trumps all, analysts can hail China as recession-proof, even after officials estimate some 20 million to 25 million jobs were lost among migrant workers. Whether or not GDP grew by 7.9 percent in the second quarter, the average Chinese person definitely did not get 7.9 percent richer.

    Explainer thanks Shen Minggao of Caijing magazine, Yasheng Huang of the Massachusetts Institute of Technology's Sloan School of Management, and independent economist Andy Xie.

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