The Chinese economy is not growing at 6.5 percent. It is probably growing by less than half of that. Not everyone agrees that the rate is that low, of course, but there is nonetheless a running debate about what is really happening in the Chinese economy and whether or not the country’s reported GDP growth is accurate.
The reason for the widespread skepticism is the disconnect between the official data and perceptions on the ground. According to the National Bureau of Statistics, China’s economic growth in every quarter last year exceeded 6.5 percent. While that is much lower than the heady growth rates China has experienced for most of the past forty years, it is still, by most measures, a very brisk rate of growth.
And yet, when you speak to Chinese businesses, economists, or analysts, it is hard to find any economic sector enjoying decent growth. Almost everyone is complaining bitterly about terribly difficult conditions, rising bankruptcies, a collapsing stock market, and dashed expectations. In my eighteen years in China, I have never seen this level of financial worry and unhappiness.
These concerns have even breached academia. One of my students told me yesterday that there was a huge increase last semester on the university website in the number of students selling their belongings because they are hard up for cash. They are selling their phones, computers, clothing, and lots of other possessions. He said the amount of selling is noticeably higher than last year, enough so that everyone is talking about it. And he indicated that this is apparently happening at other schools too. It seems that the poor and middle-class kids are squeezed for cash because they are getting much less money from home than they have in the past.
This isn’t what you’d expect to hear from an economy growing at more than 6.5 percent. So what does it mean exactly to say that China’s GDP is growing at that pace? It turns out that there are three completely different sets of problems that affect how China’s GDP growth statistics should be interpreted. Analysts must keep these three problems straight and make sure that they don’t confuse matters by conflating these separate issues.
What Does GDP Measure?
The first set of problems relates to the meaning of GDP itself. This challenge affects not just China but the rest of the world as well. This is especially true for advanced economies with substantial technology and service sectors that employ technology whose value may be substantially understated by an inability to count it accurately.
GDP is typically assumed to measure the creation of real economic value. If a country’s GDP rises by 5 percent over the course of a year, for example, this is interpreted to mean that the amount of wealth the country produced in the last year is 5 percent greater than in the previous year. In other words, it would be assumed that the country’s ability to service debt would have increased by 5 percent, which means roughly the same thing.
But there is no way to truly measure a country’s creation of real economic value, as GDP is just a proxy for whatever it is thought to measure. Economists have agreed which measurements go into calculating GDP, and the resulting sum is referred to as a country’s aggregate GDP, or the value of everything produced locally in that economy.
Of course, not all value-creating activities are counted when GDP is measured. For instance, if you teach your friend Spanish for free, you add to the wealth of the economy, but you do not add to GDP. By contrast, if he does pay you, the country’s GDP does increase by the amount of money you are paid, even though you are adding exactly the same value to the economy itself whether he pays you or not. In addition, not all measured activity actually creates value: building a bridge to nowhere, for example, creates exactly the same increase in GDP as building a much-needed bridge.
No proxy of economic value is perfect, of course, but there are real questions about whether GDP is imperfect to the point of being useless as a proxy. Does GDP really do a good job of capturing all the value creation in an economy? While this is a serious problem everywhere, it may be even more of a problem in China because of the huge amount of investment in nonproductive activities that is counted in China’s GDP data even though this investment does not add to the country’s wealth or its debt-servicing capacity.
How Accurate Are China’s GDP Statistics?
The second set of problems has to do with how carefully and faithfully Chinese statisticians at the National Bureau of Statistics are calculating the agreed-upon elements that go into measuring GDP. Do they tend to collect the data in the way that introduces mistakes that are systematically biased (upward, to show higher than actual GDP, I would assume)? Or are they actually lying to please their political bosses?
I am pretty sure that China’s economic data collection is distorted in ways that smooth out volatility, but otherwise I assume, at least until very recently, that the National Bureau of Statistics has followed generally accepted rules for calculating GDP more or less correctly. I don’t have a high level of confidence in my assumption though: as I pointed out earlier, it is hard to find any sector of the Chinese economy that is behaving the way you’d expect a country growing at more than 6.5 percent to behave. Furthermore, especially in recent years, it has been hard to reconcile other economic proxies with the GDP numbers. (See, for example, this article by Johns Hopkins University economists Bob Barbera and Yinghao Hu, which itself refers to a satellite imaging study.)
What is more, people whose work I greatly respect, like Anne Stevenson-Yang of J Capital, seem very much to doubt the data and argue that China’s actual growth rate is much lower than the posted numbers, largely because the data is falsified at some level of the collection process. But whatever the case may be, if there is indeed a substantial discrepancy between what the statisticians actually measure and what they are claiming to measure, it is very hard to make predictions about how long the overstatement will continue and how much of an adjustment it will eventually undergo.
Is GDP Measured as an Output or an Input?
The third set of problems with GDP occurs in a very limited number of cases globally (today, China is the main example). But the implications are much greater. This has to do with whether GDP is even being used as a proxy for economic activity. In China, reported GDP does not tell observers about the economy’s performance; rather, it tells people how rapidly Beijing thinks it can impose the necessary adjustments on the Chinese economy. This is because GDP means something different in China than it does in most other major economies.
In any economic system, GDP is supposed to be a measure of output, and in most countries that is exactly what it measures, however messily. The economy does what it does, in other words, and at the end of a given time period, statisticians measure the things economists agree to include in the relevant calculations, and they express the change over time as the scale of GDP growth for that period.
This is not what happens in China, where GDP is actually an input determined annually as the country’s GDP growth target. The growth target of a given time period is decided well ahead of time, and to achieve it, various entities, including local governments, engage in the requisite amount of activity, usually funded by debt. As long as China has debt capacity, and as long as it can postpone the writing down of nonproductive assets, Beijing can achieve any growth target it desires.
But this arrangement changes the meaning of GDP. Reported GDP in China is no longer a measure of economic growth, but rather a measure of political intention. As any systems theorist knows, input data reveals nothing about the performance of a system. So when analysts discuss what reported GDP indicates about the health of the Chinese economy, such thinking involves a very basic mistake in systems theory—a systems input can only offer insights about the goals of the operators, never about the performance of the system itself.
In practical terms, this means that once Beijing sets a GDP growth target, local governments are expected to generate enough economic activity to reach that target, and they are able to borrow as much as they need to do so. If this activity were productive, there wouldn’t be a problem, although it would be an amazing coincidence (or a truly incredible feat of prognostication) for the amount of productive activity truly to equal the growth target. What would be more likely in that case is that GDP growth would consistently exceed the target, which is indeed what happened until about a decade or so ago.
But if the economic activity isn’t productive, there are two requirements that allow China to set GDP growth as a systems input in a way other countries are unable to do. First, there must be no hard budget constraints, so as to allow economic entities to persist in value-destroying behavior year after year. Second, the resulting bad debt cannot be written down. Once these two conditions are met—and they are in China’s case—Beijing can set any growth target it likes and, as long as it has the necessary debt capacity, it can achieve that target.
But notice that achieving the target reveals nothing about the country’s real economic growth, for which GDP is supposed to be (however imperfectly) a proxy. Once GDP growth becomes a systems input, rather than an output, it does not indicate anything about the economy’s health or performance.
Conclusion
There is likely to be no end this year to the discussions about China’s economic growth rate and its relationship to GDP. By now, observers widely agree that China’s economy is not as strong as the GDP data suggests. And I suspect that only a handful of the least imaginative resolutely-mainstream economists (and, weirdly enough, this is more likely to be true of foreign than Chinese ones) still believe that China’s economy is as healthy and brisk as would be expected from a country whose GDP is growing at 6.5 percent and is expected to grow next year by more than 6 percent.
The problems facing the Chinese economy, and the worries expressed by Chinese leaders, are so deep that it no longer requires much imagination to figure out that reported GDP in China simply does not represent what we think it represents elsewhere. Yet some economists have not always understood the implications, and they often seem to refuse to adjust their methodologies to take into account the aforementioned problems with China’s reported GDP data. Yesterday, for example, I read a report written by an economist that discussed the implications of China’s PPP-adjusted GDP being the biggest in the world.
But any observers that are at all skeptical about the relationship between the Chinese economy and its reported GDP must dismiss the PPP-adjustment as almost complete nonsense. (I don’t mean that the PPP-adjusted data is less accurate for China than it is for other countries: I mean, quite literally, that it is almost complete nonsense). Any ratio based on reported GDP figures can only be comparably meaningful for China to the extent that China’s reported GDP numbers have the same relationship to the underlying economy—or to whatever GDP is thought to mean—as corresponding numbers in other countries do. But surely few observers still believe that.
The point is that if there has been a divergence between China’s reported GDP figures and the country’s underlying economy, there are at least three completely different ways that this discrepancy can manifest itself. Observers too often confuse the three, however. For example, I have said many times that I believe that if China’s GDP were to be expressed in a way that is comparable with that of other countries, it would be growing at less than half the current reported growth rate.
A lot of people interpret this to mean that I think Beijing is falsifying the data, but I don’t mean that at all. In my mind, the biggest problem is that China’s reported GDP is an input into the economic system, not a measured output. To make China’s GDP figures comparable to those of other countries, the input numbers would have to be adjusted with some relevant output, such as the amount of bad debt that should be (but isn’t) written down in a given time period. If this amount were subtracted from China’s nominal GDP growth rate, the resulting adjusted growth rate probably would be a lot closer to what economists think of as GDP than the country’s actual reported GDP data is.
Aside from this blog I write a monthly newsletter that covers some of the same topics covered on this blog. Those who are interested in receiving the newsletter should write to me at chinfinpettis@yahoo.com, stating affiliation.
Correction: The original version of this article included the sentence “In addition, not all measured activity actually creates value: building , for example, would create exactly the same increase in GDP as building a much-needed bridge.” The phrase “building a bridge to nowhere” was accidentally lost during the process of posting the piece to the website and has been put back in.
Comments(48)
What are your thoughts on data points less driven by economic policy? For example, though retail sales growth has decelerated significantly, it's currently at about 8%. This seems in line with a country growing real consumption by ~6%. Also, U.S. companies like Nike are still experiencing double-digit sales growth in China. This, too, does not seem in line with a 3% real growth rate. Or is your view that maybe consumption data accurately captures economic growth but investment data does not?
Economic activity drives employment, whether or not that activity is productive, MT, and employment in turn drives consumption, so I believe that the consumption figures are fairly accurate, although because they are deflated by what may be an excessively low GDP deflator, I put more trust in the nominal consumption data than the real. By the way please do not assume that retail sales growth rates are a good proxy for consumption growth rates. The former always overstate the latter. As for sales data from individual foreign companies, it isn't clear how representative they might be. Good data for Nike, for example, is countered by bad data for Apple. The overall feeling in China is incredibly gloomy.
Since GDP is merely a list of physical outputs, it is very difficult to use it to figure out growth rates and the real state of an economy, unless disaggregated comparisons are used. It is more useful to use proxies, indicators that suggest conditions, such as electricity consumption, wage growth, employment for men 18-55, volume of train shipping, whether stocks of metals and other inputs are growing or not. It is really a call of judgement. Using GDI (which our author seems to mean while saying "GDP") is the least useful, because monetary income can be distorted by government policy and debt, as our author says. For example in the UK (and the USA etc.) a rather significant part of GDI growth is caused by imports and by residential equity withdrawals, both debt-fueled.
Nike is probably the strongest US brand in China. Ask around.
From what I can see, China's GDP is distorted by the non-performing loans generated by its State Owned Enterprises. While China continues to try and remove these distortions, the economic pain this causes forces the government to refrain from the reforms necessary, and is kicking the can down the road, thereby only delaying the day of reckoning.
When these proxies to measure GDP are applied to other nations economies including developed nations economies, what do they suggest? Looking at night time satellite photos, India appears brighter than China, but does anyone think India is much more developed than China? N. Italy looks much brighter than much of Germany, but should we assume that Germany's economy in general is doing much worse than Italy's?
I suspect many countries suffer from the first and second sets of distortions in the GDP data, Hmm, but as I argue in the essay only China suffers substantially from the third set.
I guess what I'm asking is whether looking at these second set of problem proxies, like energy output growth, or satellite light data is anymore accurate than China's official GDP data. If China is moving more towards a service economy, then we should see energy output growth slowing down greatly. If China supposedly invested heavily in infrastructure in its earlier years of growth, then lighting would presumably be something they invested in pretty early on, and therefore growth would be slower in later years, since the amount of lighting for night time usage is probably close to equivalent to already developed country. Shouldn't we just be using standard of living calculated by various metrics + what type of technology country can readily produce to decide whether there's been growth or not, and how "wealthy" it is?
Michael, You have omitted something in the second section, Second Section: WHAT DOES GDP MEASURE? "..building (missing word(s)), for example, would create exactly the same increase in GDP as building a much-needed bridge."
Thanks, Ken. It is meant to read "building a bridge to nowhere, for example, would create exactly the same increase in GDP as building a much-needed bridge." I have asked the editors to change it.
Is this slowdown caused by the trade war or is the Chinese economy actually beginning to break due to its debt problems, in this case seemingly choosing unemployment? Or is it a little bit of both?
So far US tariffs have had a minimal impact on the Chinese economy, thoradicus, and only recently, while you can argue that the slowdown in the real economy began a decade ago, and GDP growth has only remained high because of the acceleration in debt. During this whole period, as we saw most vividly in 2018, any attempt to slow credit growth has resulted immediately in rapidly slowing GDP growth. Trade war makes matters worse because Beijing can only counter its impact with even more debt, but as I see it the real problem is clearly debt.
Another great article, Dr. Pettis. This concurs with my experience on the ground as a non economist. One question I have is related to your discussion of how China's GDP measurement could be made to be comparable with other countries'. Since the GDP has been overstated for a while, should we eventually expect GDP to decline substantially (either because economists will get wise and decide to change the way the measurement is done, or from the hard budget constraints that you've mentioned before)? In other words, will the GDP be forced down by needing to make the adjustment for "bad debt" all at once? On a related note, I buy that the use of GDP as in input applies to only China right now, but do you think that the other "investment lead growth miracle" countries suffered from the same idolatry of GDP during their boom years?
(C + I + G) - (U)
The overstatement of GDP is either resolved explicitly by government action or crisis, DSA, or the cost eventually and automatically gets amortized over time in the form of lower GDP growth. Over the very long run you cannot consistently overstate GDP growth, but you can over shorter time periods, depending on how long you can postpone writing down bad debt and bad investment.
And yes, DSA, I think the problem of overstated GDP was typically of many if not most investment-led growth miracles. The key, I think, is the discipline with which bad debt is written down.
Michael Pettis has been writing this article for 13 years. It's always the same and it's always turned out to be wrong. He is not alone. There are many Western trolls who make a good living pouring scorn on China's achievements (and thereby hiding them from us until it is too late to do anything). Writing about his latest book, CHINA’S ECONOMY, here's what economist Arthur K. Kroeber says: <blockquote>This book, like all works of practical economics, relies heavily on statistics. Most of the official Chinese government data are sourced from the CEIC database, which is the authorized online reseller for China’s National Bureau of Statistics (NBS). Some data not available from the CEIC is sourced from Chinese government publications, notably the yearbooks published by various agencies, the Ministry of Finance’s annual budget reports to the National People’s Congress, and occasional ad hoc reports that appear on government websites. … The unserious ones are those advanced by nonspecialists, typically analysts for hedge funds or other financial firms, alleging that Chinese data on GDP, or energy consumption, or inflation, or whatnot are falsified by the government in order to cover up some major problem. These claims, often hyped by the media, are best ignored. Economic data in all places are subject to various problems and distortions, which are addressed by the constant revision of published data and the underlying methods used by national statistical agencies, as well as by enormous volumes of academic econometric research that seek to refine our understanding of how numbers relate to reality. … Many serious analysts do believe that the government tends to smooth out the quarterly GDP growth numbers, underreporting growth when it is very hot and nudging the figures upward when it is cool. Most other data problems and inconsistencies can be explained by ordinary analytic econometric work, without resort to conspiracy theories about deliberate falsification. Those interested in making sensible use of Chinese data should consult Tom Orlik’s excellent Understanding China’s Economic Indicators (FT Press, 2012). … The falsification theory also fails a simple logical test. If the government publishes false data, it must either rely on this false data to make economic policy, or it must keep a secret set of true data. If it uses false data, economic policy will quickly run aground, as it did during the Great Leap Forward of the 1950s, when reliance on bogus agricultural production numbers led within a couple of years to a catastrophic famine that killed tens of millions of people. … This leaves the possibility that the government uses a secret set of true data to form policy, while feeding lies to the public. No evidence has ever been presented that such a secret data set exists. There are certainly a few data series that are not published but are reserved for the internal use of government officials. What is interesting is how boring these prove to be when occasionally they come to light through a leak—as, for instance, when a classified unemployment figure was accidentally disclosed at a press conference. The figure was 5 percent, compared to the published “registered unemployment” figure of 4 percent. In any case, if the government really kept a full set of secret accounts, the falsity of the published data could be exposed by the same statistical tests used by forensic accountants to prove chicanery in corporate balance sheets. These tests have been applied, and have failed to show any evidence of systemic falsification. … The more serious claim, made by several economists, is that China’s long-run growth rate has been systematically overstated, not because China sought to bamboozle the world but because its statisticians employed faulty techniques. The most recent version of this argument is by Harry X. Wu of The Conference Board, who heroically reconstructed China’s national accounts for the sixty-year period 1952–2012 in order to arrive at a better understanding of long-term trends in productivity growth. Wu concluded that, thanks mainly to weaker than reported productivity gains, China’s average annual real GDP growth during the reform era (1978–2012) was 7.2 percent, well below the official figure of 9.8 percent. … This is an interesting exercise, but it raises some conceptual problems. If we assume that the size of the Chinese economy was accurately measured in 1978, then the lower growth rate compounded over thirty-four years implies that China’s economy in 2012 was less than half as big as the official data say it was. This is impossible, because the economy’s present size is roughly confirmed by a wealth of information, including the government’s own economic censuses, and indicators including exports, foreign exchange reserves and consumption of physical items such as automobiles, oil, steel, and cement that are independently verifiable and not subject to falsification. If, on the other hand, we assume that the economy’s reported size today is correct, then the lower growth rate compounded back thirty-four years implies that China’s economy was more than twice as big in 1978 as the government believed it to be. This is slightly more plausible than the first case, but not much. Alternatively, we can try to pick values for China’s 1978 and 2012 GDP that are not so obviously incredible, for instance that the economy was two-thirds bigger than reported in 1978 and one-quarter smaller in 2012 (in which case we need merely explain away $2 trillion—an India’s worth—of phantom output). Any way you slice it, it is quite hard to reconcile the arithmetic of these alternative growth calculations with observed reality. … To anyone who has spent much time in China since the 1980s, it is clear that (a) China has grown very rapidly for a long time; and (b) the speed and nature of that growth was roughly comparable to that of Japan, South Korea, and Taiwan, each of which uncontroversially grew at 8 to 10 percent a year for about a quarter-century in the post–World War II era. The reluctance of some observers to accept that China achieved similar results to those of its neighbors, using essentially the same economic playbook, is odd. It probably reflects the belief that because China’s government is secretive, authoritarian, and untrustworthy in many political matters, its economic data must also be untrustworthy. The feeling is understandable, but the conclusion is supported by neither logic nor the preponderance of evidence. A government so dependent on sustained economic growth for its legitimacy, and so keenly aware (thanks to its own recent history) of the disastrous consequences of relying on bad data, has a strong self-interest in maintaining statistics that are approximately right, at least with regard to trends, even if they do not meet the highest standards of modern statistical science. Like all economic data, China’s must be used with care; but they are useable.</blockquote>
Eighteen years in China ! Times flies when you're having fun, Michael. I'm a great fan of all yours posts for many years. I'd be delighted if one day you magically decided to move to India and start an Indian blog about her economy. I suppose India is the next big thing, right ?
I've thought about it, Observer, but for now China is still too interesting.
Great to know that Michael ! At least you've considered moving to India. Who knows in a few years ? I'll wait (im) patiently for this day to come. Cheers !
Recently there has been a rumor that China and the US are negotiating on reducing China’s trade surplus to zero in 2 to 6 years. Could you please comment on such trade surplus targeting? It feels like treating a symptom and not the underlying problem and there are multiple ways the balance could go to zero, not all of which are desirable. Thank you.
I don't think it is even possible for them to negotiate the size of China's trade surplus, Matt. There might be such discussions about the bilateral trade balance, but as I discuss in several earlier posts, this way of thinking about trade imbalances is obsolete. In my next book (September publication, I think) I will show very explicitly why bilateral trade imbalances tell you almost nothing in today's world, unlike, say, 150 years ago.
Michael, You have omitted something in the second section, Second Section: WHAT DOES GDP MEASURE? "..building (missing word(s)), for example, would create exactly the same increase in GDP as building a much-needed bridge."
To someone whose understanding of economics is so limited that he needs to be spoonfed, this is wonderfully clear and illuminating. Thank you.
When we target SDGs, why the debate is still on GDP? Where are the economic-social and - environmental dimensions ? Are we chalkenging the right weakness?
1. "A lot of people interpret this to mean that I think Beijing is falsifying the data, but I don’t mean that at all. " 2. "To make China’s GDP figures comparable to those of other countries, the input numbers would have to be adjusted with some relevant output, such as the amount of bad debt that should be (but isn’t) written down in a given time period. " Right... so you are saying that the way they see it bad debt should not be written down. That, they really believe that bad debt recognition can be delayed indefinitely, that it's perfectly OK and that's not falsifying in any way. (no need to give me the default reply about how I dont understand, thanks). I think maybe it's time you change location... I miss the old Pettis :( The world needs the old Pettis back. Your blind spot is now the size of Neptune... and I mean that as an aspiring student who looks up to you.
You are completely missing the point, John. What you are arguing is that there is no difference between what I identify as the first set of GDP-related problems and the third set. There very clearly is. In the first set, the statisticians lie about what they record -- their data is still an output measure, but they falsify the data. In the third set, they record accurately what economists agree to record, but it is effectively an input, so that recording it tells us nothing about the system. All countries do the same thing, but in China, because producers of GDP are effectively government guaranteed, they are able to ignore hard budget constraints, and so are able to engage in activity that creates no value. Confusing the two may feel satisfying, but it adds nothing to the analysis. That's the point of my essay.
Has there been any progress at all by Beijing when it comes to reining in debt and privatising government assets? What will be the effect of the tax cuts on the economy? You said before that there is at most 1-2 years before China reaches debt-servicing capacity, but it seems like the leadership doesn't have much sense of urgency.
Tax cuts simply change the locus of borrowing, CYC, from households or businesses, depending on whose taxes are cut, to the government. They do not create credit-less fiscal expansion, as many economists strangely seem to believe. This is because if the government cuts taxes but maintains fiscal spending, they must fund the gap, which they can do either by monetizing the debt, borrowing, or selling off assets. The first and third options are separate decisions which occur whether or not they cut taxes, so that in the end, the only effect is to shift borrowing directly onto the government balance sheet.
I'm not an economist, but if I were an economist, this issue, and I don't believe it's just an issue for China, seems rather fundamental, and further all I have to do is think about it and a number of possible answers come to mind. The answer is to gather a lot of different economic statistics, the more objective the better, and to apply the same methods to many different countries. For example I just imagined a starch index. It works like this: 1) find the nearest 25 stores to your house; 2) go to each of these stores and record the prices of all the commonly sold starches in your area including wheat, maize, potatoes, various beans; 3) do this every month; 4) publish the data on a blog; 5) describe the procedure in enough detail that a volunteer in another country can do the same thing (they don't have to be an economist); and get these volunteers to report their data to you so that different regions can be compared. And then there are two further steps to perform to make this data more meaningful that require someone that is very good with numbers and creating functions, but fortunately doesn't need to be done that often. The functions needed are a 'deflator' which assigns different weights to the specific starches in a given region to reflect the most available and cheapest starches in a given area and calculate a cost per unit of starch that can then be compared to other regions even if the specific starches being consumed are different in different areas. And two, do a similar sort of statistical analysis as was done in the satellite imaging study mentioned in the essay above. It might seem like a starch index is far removed from GDP but I'll guess it has at least as much correlation, and maybe far more, as measuring lights in the night. I imagine that if I start thinking about it that I'd be able to come up with dozens of indexes where the data could be gathered by volunteers and although they are all imperfect measurements they still are perhaps more objective than things like official GDP claims. Further, and maybe I'm naïve, but this is the sort of data that should be gatherable in China and the rest of the world. Some of the things we want to know aren't so easy to measure, things like the distribution of incomes and government expenditures, but for all these things I imagine there are proxies that can be objectively gathered that have some correlation with the actual desired piece of information.
Once dozens of different relatively objective indexes have been constructed like this, we will not have a single measure of GDP, but rather dozens of different stories. The interpretation of those stories depends on the observer and what weight they put on different things. Despite the variance, my guess would be that there are going to be correlations between the different measures, and that it is in these correlations, that unfortunately require subjective interpretation, that we would be able to come up with a pretty good estimate of GDP as well as other crucial economic indicators. Now having said this I'm thinking surely this is obvious and it has already been done. It would also seem obvious to construct a website that aggregates all the different proxy indexes that economists and others have constructed and are tracking, month-by-month. And surely this is a popular website if only among economists. I've been trying to find that website as I've typed these comments in but so far I'm coming up short.
I agree, mandrewa, and I suspect most economist who have thought deeply about GDP do too. It is an extremely clumsy measure of whatever it is that we think we are measuring, and it is probably foolish even to think that there is a single measure that serve all the purposes to which we apply the GDP measure.
I agree, mandrewa, and I suspect most economist who have thought deeply about GDP do too. It is an extremely clumsy measure of whatever it is that we think we are measuring, and it is probably foolish even to think that there is a single measure that serve all the purposes to which we apply the GDP measure.
Pettis wrote: "You are completely missing the point, John. What you are arguing is that there is no difference between what I identify as the first set of GDP-related problems and the third set. There very clearly is. In the first set, the statisticians lie about what they record -- their data is still an output measure, but they falsify the data. In the third set, they record accurately what economists agree to record, but it is effectively an input, so that recording it tells us nothing about the system. All countries do the same thing, but in China, because producers of GDP are effectively government guaranteed, they are able to ignore hard budget constraints, and so are able to engage in activity that creates no value. Confusing the two may feel satisfying, but it adds nothing to the analysis. That's the point of my essay." ---- I understood perfectly what you wrote previously. You are saying that they first decide on a number and then invest uneconomically to achieve that number. You also wrote that they do not recognize bad debt in their calculation of this previously determined number. That is, when they decide on a number in advance they also decide that this number should not consider bad debt. I am saying: 1. Regardless of input or output, and the common distortions in GDP calculation globally, this is SO FAR from the normal practice that it should not be called GDP at all. They are surely aware of this and no one is naive. 2. It is also very far in spirit and practice from the chinese accounting standards/system. Image a company doing something similar...
Pettis wrote: "You are completely missing the point, John. What you are arguing is that there is no difference between what I identify as the first set of GDP-related problems and the third set. There very clearly is. In the first set, the statisticians lie about what they record -- their data is still an output measure, but they falsify the data. In the third set, they record accurately what economists agree to record, but it is effectively an input, so that recording it tells us nothing about the system. All countries do the same thing, but in China, because producers of GDP are effectively government guaranteed, they are able to ignore hard budget constraints, and so are able to engage in activity that creates no value. Confusing the two may feel satisfying, but it adds nothing to the analysis. That's the point of my essay." ---- I understood perfectly what you wrote previously. You are saying that they first decide on a number and then invest uneconomically to achieve that number. You also wrote that they do not recognize bad debt in their calculation of this previously determined number. That is, when they decide on a number in advance they also decide that this number should not consider bad debt. I am saying: 1. Regardless of input or output, and the common distortions in GDP calculation globally, this is SO FAR from the normal practice that it should not be called GDP at all. They are surely aware of this and no one is naive. 2. It is also very far in spirit and practice from the chinese accounting standards/system. Image a company doing something similar...
Michael, do you post in Chinese on a different platform? Are your writings accessible to an average Chinese reader? I really enjoyed reading the Chinese version of your September post. I would be happy to translate for you or refer to amazing translation services.
Hi Michael, I just saw in the news today that Chinese banks will start issuing perpetual bonds to shore up their capital and continue credit growth ad. infinitum. The PBOC has also encouraged the move and stand to buy these bonds and support their market. Their goal would be to promote even more credit growth. This seems to indicate that the financial repression is alive and well and in fact potentially getting worse! Although such a move absolutely prevents a financial crisis since the banks will be effectively recapitalized - when does the financial repression and investment lead growth end?
Michael... If it helps, I can tell you my industry (and company) have negotiated 10% discounts from our Chinese vendors sharing the tariff burden in the very short term. Should mean decreased margins for both sides. Medium-long term we are sourcing supply elsewhere. I recognize we have that luxury and other industries do not. Anyway, I mention this because I think your statement, "So far US tariffs have had a minimal impact on the Chinese economy..." is probably not correct. There's a cash-flow for margin trade in the near term hiding the impact, but the impact is there.
for (3), I don't understand how you reconcile the current pervasive gloominess with a willingness to lend to support an arbitrary GDP level. What mechanism is creating the gloominess, if not restrictions on credit? And if it is restrictions on credit, are you saying that the target GDP has effectively fallen by half, even if that policy has not been announced?
Hi Michael, I'm wondering if you think the Chinese economy will recover this year given the amount of stimulus the PBOC has initiated over the last six-nine months? You describe the current circumstances as the worst you've seen in the 18 years you've been there so I wonder if you think they're pushing on a string?
Hi Michael, I'm wondering if you think the Chinese economy will recover this year given the amount of stimulus the PBOC has initiated over the last six-nine months? You describe the current circumstances as the worst you've seen in the 18 years you've been there so I wonder if you think they're pushing on a string?
The claim by the author that GDP growth figures for the underlying economy is 3% rather than 6.5% is doubtful. There's a lot of vigor in many areas. What about the double digit growth in outbound tourism in 2018? The author wrote a blog post at the start of the decade predicting the Chinese economy would experience a sharp slump in growth by mid-decade and growth falling to 3% well before the end of the decade ("Chinese growth will begin to slow sharply by 2013-14 and will hit an average of 3% well before the end of the decade."). https://carnegieendowment.org/chinafinancialmarkets/45483 The decade has not proceeded according to his prediction in terms of both official figures and growth in areas like the consumer economy. The author's viewpoint that Chinese GDP figures are especially out of touch with reality are I suspect not so much based on objective analysis but motivated by a desire to save his reputation for forecasting.
This is quite a revelation. Like most everyone else I assumed that China measured GDP in the same way that other countries do. From what you are saying China's GDP numbers are meaningless because we do not know what China means by GDP. The US military has shifted its focus from fighting counterinsurgencies to countering near peer adversaries. In this case the nearest peer is China. Asia is where the US military expects to meet its greatest threat. It is not unreasonable to assume that trade policy towards China might be influenced by a desire to reduce China's capacity as a military opponent; by interfering with growth in real GDP.
I think the analysis here is more relevant for estimation of China's capital stock/Net Domestic Product rather than GDP. The existence of many NPV negative investments means depreciation should be higher . However, since depreciation itself is a component of GDP, underestimation of depreciation doesn't mean overstatement of GDP, only the overstatement of NDP
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