It is becoming increasingly clear that nobody knows just how bigChina’s economy
is. The South China Morning Post reported Monday that a new study released by the New York-based business research group The Conference Board estimates China’s unadjusted gross domestic product, $8.2 trillion in 2012, could be inflated by as much as 36 percent. If true, this would mean China’s nominal GDP is some $700 billion smaller than Japan’s. This fact, the study’s author warns, is “anything but trivial.” Indeed, Stratfor has long expressed concerns over the reliability of Chinese economic statistics
and cautioned against overuse of marquee numbers like gross domestic product. But in this case, the potential variance from official figures is great enough to raise questions about the current state and trajectory of the Chinese economy.
Let’s begin by accepting the report’s claim that the Chinese National Bureau of Statistics’ growth figures are overstated and that the Chinese economy is a third, or even a fifth or a 10th, smaller than widely believed. This forces us to elevate our sense of the scale and depth of waste and inefficiency in Chinese industry because we are looking at an economy that consumes half the world’s coal and imports huge quantities of iron ore and more crude oil than the United States even though its nominal GDP is not quite one-third the size of the United States’.
In turn, this would suggest that the Chinese government has much more work to do in its efforts to restructure and rebalance the country’s economy, including its crucial push to raise productivity and consolidate excess industrial capacity. The deeper and more widespread the inefficiencies, the more time and effort it will take to resolve them. Thus, the likelihood diminishes that China
will achieve any time soon its desired “rebalancing,” moving away from overreliance on construction and low-end export-oriented manufacturing and toward high-tech manufacturing, high-end services and domestic consumption.
Recent uncertainties in the country’s property markets, combined with widespread declines in profit growth and deep indebtedness across many of its most resource- and employment-intensive pillar industries, suggest that China’s current model of economic growth is not sustainable and may not even be stable much longer. Therefore, time is of the essence for China’s reform and rebalancing efforts, and signs that this process may take longer than Beijing expects are not reassuring.
The above scenario is unavoidably conjectural. We do not know whether and to what extent China’s GDP figures are accurate. There is no perfectly reliable gauge for the Chinese economy’s real rate of growth over the past three decades or its actual size today. Certainly, some of China’s historical economic indicators are unreliable, especially data from the early days of the country’s post-1978 Reform and Opening period, when the National Bureau of Statistics was a much less mature and capable institution. Even today, statistical anomalies and controversies over overstated growth figures are fixtures in commentary on China’s economy.
At the same time, there is reason to believe that the National Bureau of Statistics is not effectively measuring a great deal of China’s overall economic activity, namely, informal economic and household consumption activity, especially outside major cities. As a result, China’s economy could be larger than generally assumed, or at least closer to rebalancing than headline GDP and other indicators suggest. The Chinese economy is undoubtedly less efficient than it needs to be if it wants to avoid a painful, perhaps debilitating, economic correction in the coming years.
But comparing Chinese resource consumption patterns and productivity levels to those of more developed countries ignores the fact that as a rapidly industrializing economy, China uses these resources for different purposes than post-industrial economies like Japan and the United States do. This at least partially accounts for its higher levels of consumption relative to GDP (also, measured on a per capita basis, Chinese resource consumption is low). It is illuminating to consider the potential implications of a significant revision of Chinese economic growth data for our assessment of how China operates, where core Chinese reform efforts like economic rebalancing are headed and what constraints they face. In the meantime, China’s economy — whatever its size — is still growing, and so is its impact on critical global markets.
The takeaway may be that gross domestic product is just not a helpful indicator for gauging the Chinese economy. The variance is simply too great and the instruments are too blunt, at least for now. Moreover, the nature of Chinese statistical bookkeeping in the past has tended to overemphasize certain indicators — such as investment and trade, both intimately implicated in assessments of China’s inefficiency levels — while underrepresenting others, such as household consumption. Until better GDP figures are available
, Stratfor will continue to watch a handful of ancillary economic indicators, such as credit creation, housing prices and electricity consumption, that provide a more reliable, if partial, picture of real Chinese economic activity.