Study Finds Chinese Economy a Third Smaller Than Claimed

25 June 2014

In a report released on June 20th, the business research organization Conference Board recalculates Chinese gross domestic product going back to 1952. Economist Harry Wu estimates that China from 1978 to 2012 grew an average of 7.2 percent a year. Beijing’s National Bureau of Statistics reports 9.8 percent average annual growth during that period.

Wu believes that official numbers for 1952 to 1977 are generally accurate, at least when considered over the period as a whole. China’s figures, therefore, have become less reliable over time.

The discrepancy in the 1978–2012 period, which roughly conforms to the so-called “reform” era, is largely the result of Beijing’s inadequate adjustment of nominal results to account for price changes. Recently, many economists, most notably Christopher Balding of Peking University, have come to similar conclusions, that Beijing underestimates inflation when it calculates what is known as “real”—i.e., price-adjusted—GDP.

Wu’s work supports that of others who see a Chinese economy that could be a third smaller than Beijing claims. His findings, therefore, can affect our notions of which Asian nation grew the fastest or which is now the world’s second-largest economy. Hint: the Conference Board is about to become very popular in Japan.

Yet Wu’s work has implications that are far broader. Yes, an economy’s size matters, but perhaps more important is volatility. Analysts have long suspected that Beijing has smoothed results, reporting less growth in robust periods and more in down times, similar to what some corporations are accused of doing with their earnings. Wu’s calculations show far more volatility than official estimates, “suggesting,” he writes, “that the Chinese economy is more vulnerable to external shocks than the picture painted by the official GDP estimates.”

At the moment, China’s economy is vulnerable to shocks, but the biggest one might not be external. In order to create GDP, Chinese leaders have incurred indebtedness at an extraordinarily rapid pace. Beginning especially at the end of 2008, Beijing has essentially ordered the building of “ghost cities,” high-speed rail lines to nowhere, and factories with little demand for their products.

Some of the money for this binge was doled out by the central government in the form of subsidies and grants, but most of the cash was “loaned” by state banks, which were directed to rain renminbi down on free-spending state enterprises and local governments. The increase in indebtedness, as a result, was explosive. “China has accounted for more than $15 trillion of the $30 trillion in worldwide credit growth over the last five years,” writes John Mauldin, an investment commentator and adviser, in Forbes. That’s quite a feat for a country that is, at most, 13 percent of the global economy.

This lending, as it comes due, could be the shock that most everyone, including Wu, is concerned about. Up to now, state banks have been rolling over nonperforming loans—bad debt, in common parlance—so that these institutions will not appear insolvent and the problem can be pushed into later years. There has been almost no official recognition of the situation, and economists have not adjusted official GDP numbers downward to account for the bad loans.

When they do, it will become evident that the Chinese economy has been growing more slowly than anyone has imagined. In the meantime, however, Wu and the Conference Board have highlighted that China’s growth is a little less miraculous than it has been presented—and accepted by others—to be