China’s Growth Rate Remains On Track, But It’s Aiming For The The Wrong Target
Last Thursday saw the publication of China’s preliminary estimate for economic growth in 2017, and in perhaps the least surprising announcement of the year, it was exactly as expected at 6.9%. This followed a rash of stories concerning misreporting statistics in different regions, but despite the surprising scale of some of these revelations, the headline number remains unaffected.
Partly this is because of the sheer scale of China’s economy, where regional variations have little impact on the aggregate numbers, but it also speaks to another problem with Chinese data, which is that it is often not really measuring the same thing as in other economies. No other country so routinely hits its growth targets, and so rarely revises previously published numbers. Indeed, most other countries don’t have growth targets, except perhaps as notional aspirations. The UK, for example, tends to concern itself with how growth is measuring up to long-term trend, and the current U.S. target of 4% for 2018 is polemic against which to judge the success–or otherwise–of the current administration. Only China has a five year plan with a strict growth target stipulated, and they always seem to meet or exceed it.
Are the figures accurate?
To the question, “Are the figures accurate?”, the simple answer is, probably not. Recent revelations notwithstanding there have always been doubts about methodologies and the reliability of inputs. This has given rise to a proliferation of different indices, most famously the “Li Keqiang” index, with which to estimate economic activity in China. One method even looks at satellite pictures to measure the amount of light originating from urban areas, not so much to estimate actual values as to validate perceived trends.
More to the point, the lack of any retrospective adjustments–which are routine elsewhere–raises suspicions that the figures serve a purpose other than measuring actual economic activity, like projecting competence to a grateful population and confidence to a world of skeptical investors. Nevertheless, even if the figures aren’t entirely trusted, there are few who doubt the broad direction of long-term stellar performance tapering off gradually to more modest, but still impressive, levels.
And what if they are?
But then there is the other, nagging, question facing China watchers, which is “what if the growth rate is correct?” In this case, the question moves on to what that might mean: resurgent China, revisionist, possibly revolutionary China reshaping the world order around itself etc. But even here there are many doubts. Each region has its difficulties, each forecast its prejudices. Most of all there is the simple question of what GDP actually measures. Michael Pettis, for example, has long made the case that GDP does not reflect rising productivity and living standards in China, being instead a feedback mechanism for government policy.
The reasons for this are not complicated but are often overlooked, certainly in the tone of many articles written about Chinese growth rates. For all the problems with GDP as an index, it remains a useful barometer of economic activity within a market economy, but in an economy where the state is the primary actor and state-led investment forms such a high proportion of economic activity, GDP really only records the rhythms of state-led leverage. If growth looks a bit weak, credit conditions are loosened and new investment is ordered. No account is made–certainly not in the GDP figures–of whether this investment will ever generate an economic return. Instead, it is simply another target met, another negative prediction defied. And if the target was ever missed it would reveal only that somebody, somewhere, messed up.
Growing is not driving
Behind all this discussion I often feel there is a failure of metaphors. Economic growth in a market economy is organic, driven by innovation and private demand. Measuring the growth rate is like taking a temperature, a somewhat reductive assessment of diverse inputs which nevertheless reveals important trends about overall productivity. There are occasions when some economists–but importantly not all–argue the need for stimulus to smooth out the fluctuations in the business cycle, or correct for some short-term difficulties, but even so the growth rate is a question of coaxing not commanding. The economy as a whole is best understood as a kind of sailing boat in uncertain seas, and governments are able to trim sails and adjust course according to circumstances but not fundamentally to switch on the engine and ignore the weather entirely.
China, by contrast, drives its economy according to a plan. In this context, the growth rate reveals little more than the speed at which the government sets the engine. And while it is tempting to think that a steamship will always beat a sailing vessel, the problem is that these are simply metaphors, and say little about long-term productivity and efficiently allocated capital. In China’s case the alarm bells about vastly rising debts and misallocated capital have been ringing for years, and with Bloomberg reporting that SOE and infrastructure investment is now recording a higher percentage of already eye-watering levels of fixed asset investment than at the height of the 2009 stimulus, the latest growth rate should be less a cause for celebration, than concern.