Four years ago, China was crowned the world’s second largest economy, having overtaken Japan. Three months ago, the World Bank said that in purchasing power parity terms, China would become number one this year, surpassing the United States.
But now, a new study issued by the Conference Board, a non-profit New York-based research organization, suggests that China’s GDP figures were deliberately inflated over the last three decades and, in fact, the economy grew at an average of 7.2 percent a year for 30 years rather than at 10 percent.
While those growth figures are still very impressive, if true, they suggest that China’s growth rate was similar to that of other East Asian economies and its GDP today is substantially less than claimed. In fact, the Chinese economy may still be smaller than that of Japan.
The Conference Board report was written by Harry X. Wu, economics professor at Hitotsubashi University in Tokyo and senior adviser to the Conference Board China Center for Economics and Business.
After explaining his methodology, Wu concluded that “China of the 1994 to 2014 period … is approximately comparable to Japan during the 1950 to 1968 period, South Korea during the 1969 to 1989 period, and Taiwan during the 1967 to 1987 period”. That is, stellar but not spectacular.
Chinese official statistics have been contentious for years. Cumulative provincial output figures are almost always inconsistent with stated national figures, with virtually all provinces reporting higher than average growth rates.
Twenty years ago the World Bank adjusted its estimate of China’s per capita GDP by 34 percent. In 1998, the economist Angus Maddison estimated that Chinese real GDP growth averaged 7.5 percent a year rather than the official figure of 9.9 percent.
However, economist Carsten Holz of the Hong Kong University of Science and Technology, in a paper published last December, took the position that “while not every single data series is of the highest quality, nonetheless the official data get the picture of China’s economy broadly right”.
Premier Li Keqiang, when he was party chief of Liaoning province in 2007, told the then American ambassador that Chinese GDP statistics are “man-made and therefore unreliable”. He said better indicators of economic activity were those on electricity and rail cargo.
In the Conference Board paper, Wu says that since China’s reform and opening up began in 1978, “there is evidence of a strong upward bias in official GDP estimates… Removal of the bias yields a significantly lower aggregate growth rate”.
Moreover, he reports, the “inaccuracies” in reported GDP estimates at times of crisis “are not mainly caused by methodological deficiencies, but instead by political influences”.
These are serious charges but The Wall Street Journal reported that when it asked for comment, China’s statistical bureau did not respond.
According to economist Wu, official figures also appear to understate slowdowns while his results show greater volatility and slower growth. In addition, the impact of external shocks is much more pronounced that official estimates reflect, suggesting that the Chinese economy is more vulnerable to external shocks than the Chinese government acknowledges.
Wu finds particularly problematical Chinese figures for three years: 1998, during the Asian financial crisis; 2008, at the height of the global financial crisis, and 2012, because of the European debt crisis.
Contrary to official figures, Wu says, China experienced zero growth in 1998, 4.7 percent growth in 2008 and 4.1 percent in 2012. Distortion of figures for those three years, he says, account for 1.6 percentage in growth over three decades.
The Conference Board report comes at a time when there is much speculation as to whether China is headed for a “hard landing”. Premier Li Keqiang, during his visit to London last week, addressed this issue by saying: “There have been some discussions saying that the Chinese economy is slowing down, they are worried whether the Chinese economy will head to a hard landing… This will not happen.”
“China’s understatement of the impact of external shocks is thus, we assert, a principle culprit in the inaccuracy of its official GDP estimates,” the Conference Board report concludes.
It doesn’t take a Nobel laureate to understand that, after China joined the World Trade Organization in 2001, its economy became much more integrated with the global economy. Hence, it does appear strange that China seemed invulnerable to external shocks, both during the Asian financial crisis in the late 1990s and the most recent global financial crisis.
It isn’t necessary to accept wholesale the conclusions reached by Professor Wu. But they do remind us that Chinese statistics often have to be taken with a big dose of salt.
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