The fact that China habitually overstates its GDP growth is probably the worst kept secret in the world next to Russia’s support for the Ukrainian separatists at Donetsk.
In short, the idea that China’s economy is growing at a 7% clip is so laughable that at this juncture, even the very “serious” people are openly challenging it. To be sure, it’s not entirely clear what part of the fabricated numbers represent willful deception and what part simply derive from an inability to accurately assess the situation. For instance, the deflator tracks producer prices more closely [5] than it probably should, meaning GDP is overstated in times of plunging commodity prices but that might well stem more from a lack of robust statistical systems than it does from a desire to mislead the market.
In any event, getting an accurate read on Chinese economic growth has become something of a contest. It’s almost as if the market thinks that one day, the truth will come out and everyone wants to be able to say “my estimate was the closest.” What’s particularly interesting about the whole thing is that a quick look at the variables that Premier Li Keqiang himself has said are a better proxy for economic growth in the country (electricity usage, rail freight volume, and credit growth) suggest GDP growth in China may actually be running below 4%. SocGen’s Albert Edwards [6] and any number of other analysts have noted this as well.
Of course Beijing has never seen a problem that a good dose of propaganda can’t fix which presumably explains the following bit from the Global Times (a paper owned by the ruling Communist Party’s official newspaper, the People’s Daily) which attempts to portray [7] the weakness in electricity usage and freight volumes as a positive in light of the country’s transition towards an economic model driven by consumption and services:
China's industrial restructuring has helped cut electricity consumption and freight transportation, while the economy has maintained a medium-to-high growth rate in the first six months, said Zhang Xiaoqiang, executive deputy director of China Center for International Economic Exchanges.
Zhang admitted that there were some doubts about China's economic growth rate in the first half (H1), as two key indicators of economic growth, namely power consumption and freight volume, dropped remarkably.
China's GDP expanded 7 percent in the first six months this year from the same period last year, slightly down from 7.4 percent in 2014.
Power consumption, however, only expanded 1.3 percent in the first six months, sharply lower than 5.3 percent posted last year. Freight volume expanded 4.2 percent, down from 7.5 percent last year.
The industrial sector grew at a slower pace in H1, while the service sector has become a major engine for the economic growth, said Zhang, adding that the industrial sector consumes more energy per unit of GDP than the service sector.
In freight transportation, China's coal, steel and cement industries have been subject to restructuring and, thus, their output has dropped, leading to slowdown in growth, he said.
The discrepancy between economic growth and the two key indicators' growth in the first six months did not fit with previous patterns, but industrial restructuring is a new factor, and should be taken into account when analyzing the new situation, he said.
Consider that, along with the following chart, and draw your own conclusions...
[8]
