WASHINGTON – We all know that China’s economy is slowing down. No more 10% growth, year after year. Still, the official 7% growth is more than impressive, especially if compared with trends among western countries. In the US we have may be 2.5%, while sorry-looking Europe is shooting for 1%.
In this context of sluggish global growth, China’s 7%, although much lower than what it used to be, is still exceptionally good. Except for one thing. Not only we are not sure that this data about growth is accurate, the truth is that most experts believe that it is a complete fabrication.
Of course, the issue of the reliability of official economic growth figures coming from a country in which the political leadership has a vested interest in “looking good” as steward of the economy is not new.
Official figures probably not real
What is new is that the WSJ, the newspaper of record for the US and the world economy, now says it openly. (Please read: Experts Weigh Clues to Chinese Growth Puzzle, April 27, 2015).
I must say the article reporting on the huge discrepancy between Beijing’s numbers and what is estimated by several forecasting firms is polite and somewhat circumspect. The WSJ does not overtly say that the Chinese government routinely engages in fraudulent reporting when it comes to economic data. But it gets close to this by quoting others who openly state this very point, (There is an”atrocious lack of transparency” about GDP growth data, in the words on one academic).
A huge gap
And let’s be clear. Here we are not talking about rounding errors, or discrepancies due to imperfect or conflicting data collection methodologies. Here is the gap between what is stated and what is probably true. China says its economy grew by 7%. Capital Economics estimates the true figure to be 4.9%, Citibank says 4.6%, the Conference Board puts it at 4.0% and Lombard Street says 3.8%. Got that? As a minimum, we are talking about 2% magically added to GDP growth. Worst case scenario, 3%.
No more deference
Well, I am glad that finally we are willing to say that this Emperor has no clothes. For some reasons China until now has been treated with an unusual degree of deference. We have been told by China watchers that the wise technocrats operating behind the scenes in Beijing and across China had everything under control. Unlike what we do here at home, with messy, ad hoc measures and no long term strategies, the Chinese always have a plan. We focus on the next quarter, while they see well below the horizon.
Bad choices and the end of the old model
Well, it turns out that their well crafted plans did not work out so well. China’s gigantic stimulus, its own “wise” response to the 2008 global financial crisis, created growth. But it did so at an extraordinary cost in terms of massive non recoverable loans, and the creation of absurd levels of over capacity in practically every sector of the manufacturing economy.
Huge levels of debt and too many bad loans now haunt Beijing’s technocrats. Of course, China has plenty of cash to fix the consequences of all this malinvestment. But it will cost tens of billions of dollars.
Meanwhile, the magic growth formula that guaranteed the exceptional growth of the past 30 years does not work anymore. It is impossible to rely on forever growing export markets, and a never ending construction boom at home.
Why low growth is unacceptable
To put all this in perspective, the end of the old growth model does not spell disaster for China. But It means getting back to normal. However, if “normal” is a 5% or 4% rate of growth (as estimated by the economic forecasting firms quoted above) this may create huge political problems.
The legitimacy of the unelected Chinese political leadership rests in large part on the claim that it knows how to guarantee growing prosperity for every one in China. “Stick with us, we know what we are doing”.
Cooking the books
Hence the need to cook the books when the real data no longer matches the political message. Beijing is willing to admit that China has entered an era in which the “new normal” is lower growth. But the Chinese Communist Party leaders running the show are not willing to tell the whole truth about the extent of declining growth, for fear that mediocre economic results would stir up an unwanted debate down the line on possible alternatives to the Communist Party.
It is not our business to stir up political trouble in China, or anywhere else for that matter. But credible economic reporting has to be based on facts, and not on reproducing propaganda. Therefore, I welcome the WSJ’s effort to tell the truth.