Earlier today in “The Truth Behind China's GDP Mirage: Economic Growth Slows To 1999 Levels”, we pointed out that Beijing may be habitually understating inflation for domestic output, which has the effect of making "real" GDP less "real" than nominal GDP.
This is what we’ve called the “deficient deflator math” problem and it raises questions about whether China is netting out import prices when they calculate the deflator. If they’re not, then the NBS is likely overstating GDP during periods of rapidly declining commodities prices.
If Beijing is indeed understating the deflator it’s not entirely clear that it’s their fault, as robust statistical systems take time to implement, especially across an economy the size of China’s. That said, there are plenty of commentators who believe that the practice of overstating GDP is policy and exists with or without an understated deflator. Put simply: quite a few people think China is simply lying about its economic output.
To be sure, there’s ample evidence to suggest that Beijing’s critics are right.
After all, the Li Keqiang index doesn’t appear to be consistent with the numbers coming out of the NBS and the degree to which the data tracks the Communist party’s “target” is rather suspicious (and that’s putting it nicely).
In effect, everyone is perpetually in an awkward scenario when it comes to Chinese GDP data. Economists are forced to “predict” a number that they know is gamed and while that’s pretty much always the case across economies (just see “double adjusted” US GDP data for evidence), with China it’s arguably more blatant than it is anywhere else, and one could run up a pretty impressive track record simply by betting with Beijing’s “target.” For China, the NBS is tasked with consistently reporting data that may bear no resemblance what so ever to the truth.
Of course the more the fundamentals deteriorate, the more ridiculous the headline print looks and that will likely continue to be the case as the country attempts to mark a tough transition from an investment-led, smokestack economy, to a model driven by consumption and services.
For all of the reasons delineated above, Chinese economists are calling for the target to be lowered to 6.5% going forward.
Here’s China Daily:
A further cut in GDP growth is being advised by economists for China's 13th Five-Year Plan (2016-2020) to pave the way for more reforms and the switch to a consumption-driven economy.
They propose that the annual GDP growth target should be cut from about 7 percent to 6.5 percent. Some economists even see short periods of 6 percent growth as tolerable.
The ideas are being floated ahead of a top leaders' meeting later this month.
In March, the government lowered the national GDP growth target of 7.5 percent last year to "around 7 percent" this year to allow the country to shed unwanted manufacturing capacity and for its transition from an export-led growth model to a consumption-driven one.
Of course these economists were careful to justify and qualify their recommendations so as to avoid incurring the wrath of the Party:
Slower GDP growth does not mean a weaker economy, said Yu Bin, an economist with the State Council Development Research Center, a government think tank. It is only natural because the service industry is comprising an increasing share of the economy.
"The service industry generally has a lower demand for capital investment than manufacturing industry, and inevitably when translated in terms of GDP growth, you get a smaller figure," Yu said.
Yes, it's only natural. What these economists aren't saying is that while part of the "problem" is certainly related to a move away from China's "old" model of economic growth, the real problem may be that worldwide growth is grinding to a halt as the world enters a new era in which sluggish global trade is set to become structural and endemic rather than transitory and cyclical. That's bad news for an export-led economy and indeed, there's a bit of reflexivity involved here. That is, the decelerating Chinese growth machine is itself a cause for the very dynamics that are causing the deceleration.
It's with all of this in mind that we bring you the following clip from University of Peking economist Michael Pettis, whose outlook is apparently far more dour than his compatriots: