The Truth Behind China's GDP Mirage: Economic Growth Slows To 1999 Levels

Tyler Durden's picture

Right up until Beijing’s move to devalue the yuan temporarily shifted the market’s focus away from Chinese economic data in favor of the daily RMB fixings, Western investors watched closely every evening for any signs of just how “hard” China’s landing is ultimately shaping up to be. 

Of course the data point par excellence when it comes to gauging the degree to which the Chinese economic engine is sputtering is the all-important (and all-fabricated) GDP print, which has a way of conforming to Beijing’s 7% “target.”

The interesting thing about Chinese GDP data is not that it’s hopelessly overstated. Everyone knows that. There’s no telling what the “real” number is and the best way to get a read on what’s actually going on is probably to look at the so-called Li Keqiang index which tracks the variables the Chinese premier thinks are the best way to approximate output, but then again, who knows.

What’s interesting is the degree to which China’s GDP prints may be overstated as a result of something other than outright manipulation and fabrication: namely, the country’s inability to accurately measure the deflator. 

We’ve discussed Beijing’s deficient deflator math on a number of occasions. Here, in a nutshell, is the “problem”:

Effectively, the assertion is that China’s deflator simply tracks producer prices, and thus when import prices slide, the deflator understates domestic inflation and therefore overstates real GDP. In the simplest possible terms: when commodity prices are falling, China (and other EMs) may be routinely overstating GDP growth. Here’s an excerpt from FT


In the first quarter of the year, China’s deflator turned negative for the second time since 2000, coming in at -1.1 per cent. In comparison, consumer price inflation was +1.2 per cent. This means its inflation gap has jumped to 2.3 percentage points, even as it has fallen sharply in the likes of the US, as the chart shows. If the deflator is, as a result, understated, then real GDP growth is overstated by the same amount.


"A reasonable guess might be that true inflation was 1-2 percentage points higher than the deflator shows. In that case, real GDP growth in Q1 would have been 5-6 per cent [rather than 7 per cent]," said Cang Liu, China economist at Capital Economics, who added that the lower rate was closer to Capital Economics’ own estimate, based on activity data, of 4.9 per cent.

Well don't look now, but the deflator turned negative again in Q3. Here's WSJ:

China’s economy is like Tom Brady’s footballs: Deflation may improve performance.


The world’s second largest economy registered an official 6.9% growth rate, in inflation adjusted terms, in the third quarter compared with a year ago, just a smidgen off the government’s official target of 7%.


But in nominal terms, it grew just 6.2%, the slowest top-line growth for the economy since 1999. That is distressing news for anyone in China with a lot of debt, as slow nominal growth makes paying off loans more difficult. With credit still expanding double digits, deleveraging writ large remains a far off dream.


The reason the real GDP figure came in higher than nominal GDP is that the “deflator” that Beijing’s statisticians applied was negative for the second time this year. It was also negative in the first quarter.


It isn’t clear, though, if a negative deflator is warranted. While producer prices are shrinking, consumer price inflation actually ticked up last quarter, averaging 1.7%, compared with 1.3% in the second quarter, when the deflator was positive.

So, it looks as though a failure to net out import prices is once again causing China's deflator to track producer prices more closely than it should, leading to a large discrepancy with the CPI and, in the end, overstated GDP growth.

Put simply: They're habitually understating inflation for domestic output which means that "real" GDP is probably less "real" than nominal GDP.

What is more disturbing is that as the WSJ simply points out, Chinese credit continues to grow at a pace nearly double that of the overall economy...

... which as the WSJ summarizes: "is distressing news for anyone in China with a lot of debt, as slow nominal growth makes paying off loans more difficult. With credit still expanding double digits, deleveraging writ large remains a far off dream."

Assuming what both Citi and UBS have said previously, namlye that the world is approaching its maximum debt capacity, is a very big problem for China and the rest of the world.

That's the key takeaway.

Here's a bit of color from BNP:

In nominal term, GDP growth has slowed more sharply to 6.2% y/y in Q3 from 7.1% in Q2 and 6.6% in Q1, on lower inflation. GDP deflator dipped to -0.7% y/y from 0.1% in Q2, thanks to deeper deflation in the secondary industry (-5.3% in Q3 vs. -4.1% in Q2). Inflation of the service sector stayed flat at 3.1% y/y, thanks to decent growth in labour cost and rental prices.

What this means is that when viewed objectively, this was the worst GDP print of the 21st century. Here's the chart going back to Lehman:

As we've noted before, this is interesting because it points to a specific deficiency in statistical analysis (as opposed to sweeping accusations about a generalized and endemic lack of transparency) and thus seems to merit a response from China’s National Bureau of Statistics. 

On that note, we'll leave you with the official response to the above from the NBS:

"In general China’s GDP deflator hasn’t been underestimated, nor has GDP growth been overstated. Both objectively reflect the real situation."


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nuubee's picture

So the Chinese *CAN* truly party like it's 1999.

VinceFostersGhost's picture



Beat me to!

knukles's picture

Gotta hand it to these guys.  They forecast 7% real GDP and get 7% real GDP. 
Amazing how central planning works so well.  Maybe I'll vote for Bernie

nuubee's picture

Ol' Bern will make sure that expenditures meet expectations.

15horses1donkey's picture

I thought it was about official lines of communication being compliant and complicit, where as western media is defiant and complicit?

tarabel's picture



He promised a raise in the chocolate ration as well.

TheReplacement's picture

Since the system IS going to fail then yeah, you do want someone like a socialist in office to take the blame. 

JustObserving's picture

They're habitually understating inflation for domestic output which means that "real" GDP is probably less "real" than nominal GDP.

Let's not forget that US inflation numbers are also completely fake - so real US GDP is much, much lower:

The Chapwood Index (Inflation Index) for 2014 was 9.7% and official CPI in the land of the free was only 0.8%.  So the Nominal GDP of 5.6% for 2014 becomes real GDP of -4.1%.

The revised real GDP for years 2011 to 2013 worked out to -6.2%, -6.5%, -6.5% respectively.

What is the Chapwood Index?

"The Chapwood Index reflects the true cost-of-living increase in America. Updated and released twice a year, it reports the unadjusted actual cost and price fluctuation of the top 500 items on which Americans spend their after-tax dollars in the 50 largest cities in the nation."


The Ram's picture

This sounds dubious to me.  I mean, the Chinese economy was pretty much going gang busters in the 90's.  10% economic growth (or whatever it was in 1999) is certainly not a hardship, especially since the base is must larger in 2015.



KnuckleDragger-X's picture

The Chinese economy resembles quantum mechanics and nobody wants to actually open the box and see how the cats doing.....

knukles's picture

Serious problems of MSG Entanglement ... The more you eat the more you want to eat a few minutes later.

novictim's picture

Building empty cities and producing unneeded cement and then creating a new island from it all is not GDP growth.

My strong suspicion is that China does not have positive growth at all.  Capital flight from China should be cratering that "growth" into negative territory. This is the truth that dare not be said...shhhhh.

Pliskin's picture

All these U.S. millionaires/billionaires who send their money to the Caymans and such is that not capital flight?

What?  Just sending it on a holiday by the beach are they...?   Shhhh.

pods's picture

I too like my herring red.


InflammatoryResponse's picture

I totally agree novictim...


a while back people on here and elsewhere talked about the slowdown of ores etc. leaving Australia...  we see full parking lots at stores but people are rolling around full carts. 


stuff isn't moving... so it isn't getting manufactured... so it isn't existing at the raw material level either.



Pliskin's picture

Lying about economic figures...shock, horror, that would never happen in a democratic country such as the U.S. 

knukles's picture

Thank God!  I was getting concerned about that, I was.....

yogibear's picture

More Chinese defense of new island they built.

Pushing Japan around.

Think of China as being like Japan of the 1930 in addition it's the largest industrial nation.

Japan of the 1930s with the industrial might of the US in the 1930s.

What better way to take your nation's mood off of the economics than to fire up nationalism and war?