Is GDP still a useful measure of China’s economy?

Woven between manicured lawns and minimalist office blocks in a new district of Chengdu, southwest China, Zhu Bolong is a coder turned dancer turned entrepreneur. He is looking for a bigger space for his video company.

Initially, office space went for 60 cents per square foot, but now it’s $1, he said. „It’s supply and demand. I think the price is high, but people are lining up to rent. A lot of people say the economy is slow, but it doesn’t feel like it.

China announced on Monday The economy, in the form of gross domestic product, grew by 6.3% from April to June compared to the same quarter last year.A faster pace than 4.5% in the first three months of 2023. Premier Li Qiang Last month gave an early sign that second-quarter growth may have accelerated He said the economy is on track to expand at 5% per annum.

China generally meets economic targets set by officials, regardless of economic conditions, which has raised questions about the accuracy and reliability of Chinese GDP figures.

What is GDP?

International Monetary Fund Define GDP A measure of the „monetary value of goods and services” purchased by the end user produced in a country during a given period. But GDP has its limitations.

“A classic joke in China is when it [a local government orders that a road be built], some officials were not happy with the shape of some parts of the road. They are [give the] Order the road to be removed, and then they ask another company to rebuild the road,” said David Li, an economics professor at Beijing’s Tsinghua University.

Zhu Bolong stands in his office in Chengdu, which he says is a little crowded. He wants to move to a bigger office space, but the rent has gone up, he said. (Charles Zhang/Marketplace)

All stages of that process are counted in GDP, but they do not necessarily add value to the economy.

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“GDP is not a measure of how happy people are in the end [or] Wealth,” Li said.

China is not the only country facing questions about how critical inputs and components of output are measured.

„Typically, those discussions are very technical,” said Logan Wright at the Rhodium Group, a research firm in Washington.

„The difference in China is that gross domestic product has taken on enormous political meaning linked to the legitimacy of the Communist Party.”

In the United States, all types of output are measured to calculate GDP, whereas in China, officials first set GDP targets, which critics say, It forces local authorities to borrow as much money as they need to reach the goal.

And many economists believe these numbers overstate the growth. Occasionally local authorities Punishment for falsifying economic data. However, Li said the issues particularly affect China’s quarterly gross domestic product figures, which use data from local governments.

„The annual data, which is usually revised in April or May, is more accurate because it is done by the National Bureau of Statistics,” Li said.

GDP Reliability

Some economists say China’s GDP figures are less reliable.

„That means from 2014 to 2019, Chinese GDP growth barely moved, just over 1.5 percentage points for six years,” Wright said. „We may never find another major economy, especially one of that size, where GDP has been stable over time.”

Chengdu's Taikoo Li commercial district (an outdoor shopping area lined with shops on both sides) gets more crowded at night.  (Jennifer Bach/The Market)
Chengdu’s Taikoo Li business district is packed with luxury retail stores and can be busy even on weeknights. (Jennifer Bach/The Market)

Meanwhile, he said, China’s interest rates are climbing, commodity prices are falling and credit conditions are tightening, but none of those fluctuations are showing up in China’s GDP.

„China’s economy growing at 5% or faster in 2023 is a more questionable story,” Wright said. „It’s hard to know exactly what’s causing that growth.”

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However, some economists believe that a 5% GDP target is entirely possible – technically speaking.

“When you measure Chinese GDP, you always have a base year. The base year is the previous year,” Li said.

In 2022, all the COVID lockdowns and mass testing slowed the Chinese economy to 3% growth. „Therefore, 5% GDP growth is an easy target for the Chinese economy today versus the worst-case scenario of 2022,” Li said.

Not everyone buys that argument.

„What is overlooked is the reasons [China’s economy was] The weak last year is still happening this year, especially in the property sector,” Wright said. „The property sector is still falling … still dragging down growth.”

Property accounts for roughly a quarter of China’s economy. According to calculations by ReutersProperty sales by floor space fell 28.1% in June on a year-on-year basis, after falling 19.7% in May.

On the streets, China’s economy certainly looks like it’s recovering. In Chengdu’s Taikoo Li shopping district, crowds form in front of luxury retailers such as Dior and Gucci. Household consumption is also increasing – but not fast enough.

„Until now, we don’t have a good measure of economic intensity,” Li said. “So, let’s settle on GDP. Use it as a rough answer to how the economy works.

He said investors should also focus on emerging sectors such as new energy and changes in government policy for clues to the health of China’s economy.

Wright agrees that it is important to pay attention to what Beijing is doing.

Central government officials are “cutting policy interest rates to stimulate credit demand. „They are talking seriously about the need to restructure local government debt to put local governments on a firmer footing,” Wright said. Beijing is also considering other stimulus measures, he said, and what officials are expected to do if an economy grows by 5%.

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The health of China’s economy

„The reality is that China is now suffering from a very significant structural recession,” Wright said. „That slowdown started with the weakness of credit growth in 2018 and 2019. It has now intensified with the COVID restrictions in the last three years”.

Li admits China’s economy is currently weak, but says it still has a lot of potential.

As for entrepreneur Zhu, he is still looking for a bigger office space for his business, but he has cut back on what he spends on himself.

“It’s not that I don’t have money in my pocket, but the mindset has changed. I want to save to survive in the long run.”

Although the GDP figures point to brighter days ahead, he compared it to stockpiling food for the winter.

Additional research by Charles Zhang.

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