Standard Chartered present an interesting view on Chinese growth, considering all eyes are now firmly pinned on the productivity rate of the world’s fastest growing economy.
How China performs could largely determine the extent and depth for the current crisis. But how far would the Chinese go to maintain an illusion that all is well?
Official Chinese figures, especially unemployment numbers, are regularly treated as suspect by analysts. Currently the IMF expects Chinese growth to come in at just over 9 per cent in 2009. The World Bank meanwhile has cut its growth forecast to 7.5 per cent, the slowest rate of expansion since 1990. Beijing itself sees growth coming in at over 8 per cent. But, asks Standard Chartered, how will we know what they will really achieve?
They reference the Rawski case, the last time serious economists believed real growth slumped well below the official figures.
Thomas Rawski at the University of Pittsburgh argues that China’s official 1998-99 GDP data is ‘totally divorced from reality’. He believes that maximum growth in each of these years was 2% and that cumulative growth over 1998-2001 was somewhere between 0.4-11.4%, compared to the official (pre-census revision) number of 34.5%.1 To support his view, Rawski cites reports of stagnating rural incomes, mass layoffs, inventory accumulation, lower steel production, etc.
There was also Harry Wu at Hong Kong Polytechnic University. He showed that while the NBS did not collect data on prices, its method for revising real GDP numbers should have been reliant upon price data. But…
Wu believes that the NBS derived a GDP trend it thought looked reasonable and then revised the deflators (overall changes in prices) to match.
Accordingly, Wu had a go at constructing his own set of industrial growth numbers:
Nevertheless some critics suggested Rawski and Wu’s views may have been too sceptical, citing tax data. As taxes are paid on the back of value-added activities the theory suggests they should reliably follow growth. Likewise imports. These did track accordingly.
Rawski’s explanation – that the data is not a reliable indicator. Standard Chartered explains:
This is because local government officials are strictly judged on their ability to raise taxes. They thus have an incentive to ‘fake’ taxes, moving money in and out of the accounts to exaggerate revenues. Moreover, over the past few years, local governments and central ministries have been transferring monies which had previously gone into their informal, unseen accounts into the main Ministry of Finance (MoF) account. This process may well have accelerated in hard times in order to ensure that officials met their official revenue quotas. As far as imports go, Rawski thinks anti-smuggling efforts during the late 1990s may have forced more trade to go through official ports, meaning this proxy is also unreliable.
Professor Carsten Holz at Hong Kong University of Science and Technology, meanwhile, found trouble with revisions to the 2004 economic census. Again Standard Chartered explains:
He found numerous inconsistencies and evidence suggestive of manipulation. He concludes: ‘one may begin to wonder about the possibility and likelihood of professional statistical work in China. For the time being, the 2006 benchmark revision implies that Chinese statistics have to be taken with a rock of salt.‘
In conclusion, Standard Chartered says it cannot ignore that nearly all growth proxies indicated a sharper slowdown occurred in 1998 than was noted by official data. But, Rawski’s 2 per cent appears an understatement.
While there have been important improvements to Chinese statistics, the bank nevertheless states markets should remain cautious when it comes to Chinese GDP data – as well as a few other headline numbers, (especially when the incentives for mis-reporting are strong).
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