China announced its 2013 economic results Monday. Gross Domestic Product (GDP) grew 7.7 percent to RMB56.9 trillion – about US$9.3 trillion. It may seem odd that GDP and other statistics measuring the actions of 1.3 billion people can be compiled in barely three weeks, but it’s comparatively normal. After all, the inflation rate was compiled in nine days.
The first problem with Chinese numbers, then, is they are frequently hard to credit. The second is the conventional view of GDP and its relationship to more jobs, greater wealth and other beneficial outcomes is deeply flawed. The combined outcome is a serious mischaracterization of how China is doing. The oft-used line that “the economy” is slowing but still boasts the world’s fastest rate of growth is inaccurate and misleading. What matters most is that available data indicate debt accumulation will induce economic stagnation.
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The National Bureau of Statistics starts its communiques with odes to the Communist Party, “faced with the increasingly complicated and severe external and internal conditions, the Central Party Committee and the State Council have united and led the whole nation to thoroughly implement the spirit of the 18th Party Congress, committed to the general tone of moving forward while maintaining stability, firmly deepened reform . . . “
These are reminders that the overriding function of the bureau, and the rest of the government, is to ensure the Party’s grip on power. The Party does not like instability or prolonged bouts of bad news, so these do not officially occur. China never acknowledges even brief periods of GDP growth below 6 percent, inflation rates near 10 percent, or urban unemployment over 6 percent. Rural unemployment is not discussed at all.
The China-watching community will acknowledge that GDP growth is smoothed, consumer inflation can be misleading, and unemployment is not reported properly. But these points are glossed over for the sake of the convenience of using official statistics. Yes, government figures used to be poor but, it is said, they have gotten better.
When did they get better? In 2007, when current Premier Li Keqiang dismissed Chinese numbers as “man-made?” In early 2009, when policymakers demanded arguably the largest stimulus in history even though official GDP barely budged? When non-performing loans from that stimulus were never acknowledged? When the gap between the Chinese investment measure (fixed asset investment) and the global standard (gross fixed capital formation) hit RMB4.6 trillion in 2008 or when it hit RMB11.1 trillion in 2012? When the consumer price index was much smaller than the implicit GDP deflator in 2011 or when it was a bit larger in 2013?
Unemployment is the worst case. Beijing counts only a subset of those unemployed in cities and no one at all outside them. Official unemployment in the range of 4.5 percent could be off by a factor of four if rural areas are included. No independent observers dispute this or doubt that the reason is political expedience, yet other data are treated as being close enough.
Published statistics are internally inconsistent in gross and subtle ways. It is well known that provinces report numbers inconsistent with national figures. At the national level, core measurements have no coherent relationship with GDP. Growth in narrow money (M1) weakened sharply 2010-2012 with little impact on GDP. It rebounded considerably in 2013, with little impact on GDP. The same is true for power consumption from 2012 to 2013: a clear acceleration while GDP growth was flat.
There are countless examples outside economics of the Party insisting on distortion or suppression of information. It is merely wishful thinking that official statistics can be taken at anything like face value.
The low reliability of official numbers obscures the true state of the Chinese economy. So does the global obsession with GDP as an economic indicator. Beijing is ostensibly moving to de-emphasize GDP but most of China, not to mention most of the world, has not yet gotten the message. GDP is hardly “the economy,” as it is frequently called. It is a bookkeeping device, and a rather strangely crafted one.
For instance, if buildings are quickly built, torn down, and new ones put in their stead, each action adds to GDP, though the process adds little or nothing to national wealth. This example may seem artificial but the development of the Chinese property market shows it is not. In general, the creation of overcapacity across the economy – empty malls, new steel plants, unused transportation facilities – augments annual GDP but can only reduce prosperity.
In 2013, GDP per capita officially exceeded RMB42000, but urban income was reported to be below RMB30,000 and rural below RMB9000. Those figures could certainly understate income but they are the ones that matter. GDP per capita means nothing; it buys nothing. It is a fiction and a particularly novel one in China, where reported GDP is even less reflective of the state of the economy than elsewhere.
Even if measured correctly, GDP is merely a measurement. It does not cause anything to happen, just as a scale does not cause one’s weight to change. The false imputation of causality most frequently has to do with jobs, as in “China needs 8 [or 7.5 or 7.2] percent GDP growth to create enough jobs.” But GDP is a summary statistic that says nothing about the nature of activity. It can be either labor-intensive or capital-intensive. China’s excess liquidity and rising land prices boost GDP, but create few jobs. The labor-intensive manufacturing operations Beijing wishes to forgo are job centers.
Given the accuracy of the figures and the low utility of GDP, the global focus on Chinese GDP growth shifts of two- or three-tenths of a percent is absurd. Official GDP reports say almost nothing useful about the economy.
The Debt Tell
What matters most right now in China is no mystery, but the data and implications remain murky. The key development in 2013 was the extent of debt accumulation.
A typical observation is the economy must be weakening because reported GDP growth has slipped from 13 percent in 2007. In fact, the economy began faltering while GDP was still accelerating. Starting in late 2002, investment started to displace efficiency gains from reform as the primary economic engine. Growth in fixed investment jumped 10 percentage points in 2003 and has still not returned to its 2002 pace despite a base now in excess of RMB43 trillion. There are even provinces where fixed investment is reported as larger than GDP. This indicates either increasing falsification of statistics or increasing waste.
We have a recent official figure for local government debt: RM17.9 trillion in the middle of last year. Because this debt is owed directly or indirectly to banks and some of it was borrowed by state-owned enterprises, it overlaps in unclear ways with banking and corporate debt.
The reports on corporate debt itself are more scattered but considerably worse. The Chinese Academy of Social Sciences put the 2011 debt-to-asset ratio of Chinese firms at 105 percent, highest among the 20 countries evaluated. Standard Chartered estimated total corporate debt at 117 percent of GDP in 2012, where the Bank of International Settlements sees risks mounting at 90 percent. Large Chinese firms, almost all of them state-owned, are in far worse shape than their American counterparts in terms of debt.
The state of the financial system is less clear. Bank credit quadruped from RMB17.7 trillion in 2004 to RMB71.9 trillion in 2013, even though limited credit had been successful for 25 years through 2003. On top of this is non-bank lending, now called “shadow finance.” The extent of shadow finance was underestimated last decade but there is no doubt it has expanded considerably. On some measures, total credit has risen more sharply than in 1980s Japan. While the true level of non-performing assets is hidden by government threats, it is very large in absolute terms. Given the quantity of loans made as conditions deteriorated in early 2009, the proportion of non-performing assets could also be high.
China does not have a commercial financial system – most parties are arms of the state. It is difficult for such a system to suffer an acute financial crisis and one similar to the credit freeze that hit U.S. and others is almost impossible, since counterparty risk is very low. The danger is not crisis, it is stagnation.
And the antidote to stagnation is certainly not more official announcements of sound economic results. Rising debt indicates that economic performance, however characterized, is unsustainable. To see how China is truly faring, watch very carefully: (i) the various debt indicators and (ii) the revision and implementation of the reform program announced in November. Beijing may claim solid GDP growth, low unemployment and contained inflation for years to come, but without reform debt will bring the economy staggering to a halt.
Derek M. Scissors is a resident scholar at the American Enterprise Institute (AEI).