Guessing Game: China's "Real" GDP Growth Could Be As Low As 3.8%

In “Ignore This Measure Of Global Liquidity At Your Own Risk” we pointed out that according to the very data points which Premier Li Keqiang himself prefers to examine for an indication of where the economy stands (electricity consumption, rail freight volume, and credit growth), China’s GDP growth is likely running far below the reported 7% figure. Here’s the visual:


Since then, the country has turned in a rather abysmal spate of data including a 15% decline in exports, the lowest Y/Y industrial production growth since 2008, astonishingly low rail freight volumes, and, at the aggregate level, the worst GDP growth in six years.


Of course the reality of the situation is likely far worse as demand for steel (and by extension, iron ore) collapses on the back of Beijing’s attempt to transition the country towards a more service-based economy.

Meanwhile, the “war on pollution” could hit industrial production hard going forward causing still more pain even as government options to fight the downturn are limited by a reluctance to devalue the yuan which, thanks to a strong dollar and unprecedented stimulus in Japan and Europe, has seen double-digit REER appreciation over the past year. 


What does all of this mean? Well, a lot of things including that Chinese QE may be inevitable (if it’s not already here), but from a GDP perspective it means that no one really knows what the real figures are, as a sharply decelerating economy makes the official numbers even more opaque than they were in the first place. Here’s WSJ with more:

When China released its tabulation of first-quarter growth earlier this month, the 7% figure—the worst in six years—stirred fears of a deepening slowdown.


It also raised fresh doubt about the trustworthiness of China’s own statistics.

Efforts to discern China’s actual growth rate have kept economists pinned to their calculators for years, and for good reason.


For one, the figures are suspiciously smooth, with none of the sharp gyrations seen in the U.S. or other economies. The methodology often appears inconsistent or contradictory. Also, no one knows how China accounts for inflation when tabulating its gross domestic product…


Then there are the many ways China’s GDP figures appear to clash with other data points considered more difficult to manipulate. Economists point to the discrepancy between headline GDP growth and industrial production, often seen as a proxy for growth, which grew by 5.6% year to year in March—its lowest level since late 2008.


How the agency obtains GDP figures is “anybody’s guess,” said Hong Kong University of Science and Technology economics professor Carsten Holz, author of a paper on the quality of China’s GDP statistics, citing what he calls an “atrocious lack of transparency.”


Suspicion centers on two major issues: How willful is the fudging, and does China have a second set of books so leaders know what’s “really” going on?

By just how much are the numbers overstated? As indicated, no one really knows, but here are some guesses as to what the “real” data might look like: