The Picture Of China's Economy Almost Certainly Wrong

When China’s Lazarus, Deng Xiaoping, finally became the absolute leader of the world’s most populated nation in 1978, the country began its evolution from being an evil empire to becoming America’s most prolific trading partner. When he died in 1997, China was well on its way to becoming the fastest growing large economy in the world.

For at least ten years China’s GDP has grown at more than 10% and it is now the third largest economy in the world. Many projections show it passing the US the world preeminent economy before the middle of the century.

It is no secret that outsiders have been suspicious of how well China keeps it numbers on GDP, unemployment, inflation, and other key measurements on its financial health. Some analysts even believe that China has cheated itself by understating its growth. Less than a year ago, The Economist made the observation that "Amazingly, most economists reckon that China has understated its growth in recent years." Most revisions that the Communist central government made over that period were revisions upward from the original numbers.

The two deep, but hard to prove, concerns about China’s inability to track its own economy are that it does not have the data collection infrastructure to get accurate data or that the government benefits from fudging the numbers to make growth seem uniform from year to year. The belief that China cannot accurately gauge the details of its own economy is probably accurate. In the US where the government has decades of practice at collecting and reporting figures, they are nearly always revised demonstrating that they were not accurate in the first place.

If China has been "gaming" its numbers for propaganda purposes, that program may be continuing and the government may now be overstating its economic health. The New York Times recently pointed out that graduates of the best universities cannot get jobs. The Observer reported that "as the Chinese New Year dawns and the global economic crisis deepens, the government fears that mass unrest could challenge its control of the country."  It is a radical but effective way for citizens to make the point that in China they look to the government as a sure provider of the sustenance.

These pieces of data about China’s unemployment are too modest to allow any conclusion, but what is not is the sharp drop in GDP in every major importing nation around the world. There is no China Miracle without the Western miracle of seemingly endless consumer confidence and the buying power that accompanies it.

In the fourth quarter, China reported that its GDP growth dropped to 6.8%.  Most analysts had expected better and were concerned about the rapidity of the slowdown. But, anyone paranoid about the country’s ability to report numbers or completely control key information for both its own citizens and the outside world should be willing to believe that the figures are now being pitched higher than they really are.

There is certainly more than anecdotal information about members of China’s middle classes leaving for rural areas as large factories close. The stories about exportable goods sitting on docks and in ship holds are not fabricated. China is hostage to the demand for its inexpensive goods. If unemployment in large developed nations moves to 10% and GDP in the same countries begin a violent contraction, the China economic expansion will have lost all of its fuel.

How much is China overstating the health of its economy? Is 6.8% GDP growth a false figure which has been posted while China’s economy is actually shrinking? Certainly not. But, could GDP growth be closer to 5? The answer is probably yes. If that is the case, then 2009 will be worse and the last wheel of global expansion will have fallen off, even as its details are being inadvertently or actively concealed

Douglas A. McIntyre