Scrutiny Follows China’s GDP Report

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BY MILKA SANTANA

What do Louis Vuitton bags sold in China Town have in common with the third quarter GDP growth reported by Beijing? To say the least, both have generated quite a bit of skepticism. The question is whether Beijing’s numbers are deserving of all the suspicion.

During October, China released third quarter GDP growth of 6.9%, continuing a decreasing trend from the 10% average during the last three decades. Nonetheless, it didn’t take long for the international community of economists to start the scrutiny. Some GDP skeptics claim the actual growth could be as low as 3%. They are quick to point out the now infamous quote by China’s own Premier of the State Council, Li Keqiang, referring to the officially reported numbers as “man-made and therefore unreliable.”

Other reasons for the suspicion range from well-founded to speculative. Some mention a 6.9% growth just seems too close to the target of 7%. Famous independent economist Andy Xie reminds us local officials’ promotion is contingent on GDP growth, given them strong incentives to reach towards the target. While others base their skepticism on the inconsistencies between the high GDP and the lower electricity, coal and oil usage. For example, third quarter electricity only increased by 0.8%. Various alternative indexes have been generated, as well. Based on metrics such as freight shipment and cargo volume, a macroeconomics research firm has calculated an estimate of 4.5%. The same firm reports China has been overstating its GDP since 2012.

Yet, it does seem the international community is very quick to accuse China of misrepresenting data. Many of these discrepancies can be easily explained. For instance, the nation’s economy has been focusing on moving towards consumption and away from the heavy manufacturing industry. Calculating cargo volume, coal and freight shipment might be an outdated way to estimate China’s new growth model. Some better ways might be to include consumption and service-oriented industries like domestic tourism, which increased by 15%. Further, the decrease in electricity usage can be a sign that China’s aggressive energy efficiency policies are working.

The jury is still out on the authenticity of China’s numbers, but the question that often gets ignored is: Is the new type of growth beneficial for China’s long-term prosperity? Although the GDP enquiries are relevant, China investors should also be concerned with the source of this growth. There should be a greater focus on the remarkable re-balancing that the nation is undergoing. The capital-intensive industries and fixed-assets investment growth have been decreasing, while consumer spending and the service sector are taking a bigger portion of growth. This is good news for both the health of the economy and for the environment.