Deflate-gate is not only about football anymore…
The debate on a China soft landing or hard landing continues to rage on, with reasonable arguments and notable evidence on both sides. The doubters would have you believe that the Chinese authorities are fudging economics statistics enough so that actual growth is at least a point or two below the official 7% GDP target, and could be dropping faster than anticipated. The China bulls on the other hand say that the rapid growth in the services sector will keep the Chinese economy humming along right at the government target.
In a September 15th and 16th report that reviews a wide variety of economic data from numerous sources, the Bloomberg Economics team concludes that while “China’s growth is weak, perhaps weaker than the official data suggest, but not collapsing.”
The report highlights that two well-known China analysts have recently made fresh contributions to the discussion about the reliability of Chinese GDP data. First, Mark Williams of Capital Economics argues the Chinese GDP deflator (a broad measure of price changes) is flawed. He argues if the deflator is under-reporting inflation, then China’s official growth rate is very likely exaggerated. Nick Lardy of the Peterson Institute for International Economics advances the argument that the burgeoning services sector will keep the economy of the Middle Kingdom on track even if the economic statistics can’t be fully trusted.
China GDP deflator may be flawed, but not that big a deal
Bloomberg’s Tom Orlik believes that Capital Economics has probably found a real issue with the GDP deflator. That said, he is “not convinced it has a material impact on the growth rate.” Orlink also makes the point that if the deflator is truly significantly skewed, that impacts the entire history of the GDP series, and not just the growth rate for 2014 and 2015. This makes determining the impact of any skew in the GDP deflator a good bit more difficult to quantify.
Orlik also agrees with Nick Lardy’s assessment that being overly suspicious of China’s growth rate simply based on a handful of historically volatile industry indicators is unwise. That said, when you look closely at a broad set of consumer and services-related indicators, it’s not easy to connect the dots to show that the services and consumer-based “new economy” is growing fast enough to fully offset the ongoing slowdown in the “old economy” and keep economic growth at 7% or even 6%.
In concluding, Orlik notes: “Having taken issue with both the critics and supporters of China’s official data, we cannot give a sweeping endorsement to either camp. We don’t have total confidence in the GDP numbers, but neither do we think any of the proxies or alternative calculations provides a compelling alternative.”
In his conclusion, Orlik also also picks up and carries the torch for greater transparency in the production and dissemination of economic data related to the Chinese economy. Maintaining his middle of the road theme, he says that China’s economic data system is not a “black box”, but is also far from the “open book” that it should be.
Separately, in a September 18th note to clients reviewed by ValueWalk, Capital Econ states:
China is growing at a slower rate than a year ago and much slower than five years ago. But the widely-held view that growth has slumped in the past few months – which seems to have been a key factor in the Fed’s decision not to hike – is wide of the mark. In fact, a range of measures covering imports, output and spending suggest that conditions have stabilised and, in many cases, improved since the start of the year. (See Chart.) To be fair, Fed Chairman Janet Yellen yesterday raised concern that China might slow further, which is certainly a risk worth considering. But given the evidence of stabilisation in recent data, and the fact that further monetary and fiscal support are in the pipeline, a more likely outturn is that China’s economy strengthens over the quarters ahead.