China’s Illusory Growth Numbers

As i read today’s story in the Wall Street Journal I was reminded of an old joke.  It seems that machine politics in one city had gotten so corrupt that when thieves broke into the mayor’s safe all they found were the results of next year’s elections.

We know that China has all the economic trappings of a capitalist society and the government of a communist dictatorship.  Totalitarian governments that set production goals have ways of providing statistics that show those goals have been met.  The question people are asking is whether those statistics are believable.

Beijing appears to be on track, yet again, to hit its official growth target. According to China’s National Bureau of Statistics, gross domestic product rose 7.8% in the third quarter of 2013, well on its way toward hitting the official target of 7.5% GDP growth for the year.

But can these numbers be trusted? Beijing has a long tradition of setting and then claiming to exceed high growth targets, which makes growth appear both rapid and stable. For years, China reported much less volatile economic growth than other developing nations, but lately volatility has all but disappeared. Since the start of 2012, China has reported a GDP growth rate within a few decimal points of the official target—every quarter.

Another reason to question these numbers is that China’s second most powerful official has. In a 2007 cable revealed by WikiLeaks in late 2010, Chinese Premier                                       Li Keqiang was quoted acknowledging that official GDP numbers are “man-made.” Mr. Li, who was head of the Communist Party in northeastern Liaoning province at the time, told then-U.S. Ambassador to China Clark Randt that he looked to more reliable numbers—on bank loans, rail cargo and electricity consumption—to get a fix on the actual growth rate.

Some economists now call these economic indicators the “LKQ Index.” That index shows that China’s economic growth was a lot weaker than officially claimed in the first half of 2013 and picked up in the third quarter only on a new round of stimulus to meet the annual GDP target of 7.5%.

Questions about China’s economy are not just of academic importance.  China, with its huge population and it’s rapidly growing economy has a tremendous impact on the rest of the world.  They are not just the producer of low-cost consumer goods but also the consumer of huge amounts of raw materials.   China is the U.S. second largest trading partner.   They are the world’s largest importer of oil and coal in the world.  They not only export but also import hundreds of billions of dollars of electronic equipment.  If the Chinese are not growing as rapidly as their statistics indicate, they may be creating a “bubble” economy which can explode like the housing bubble did in 2008 with a very dramatic economic impact felt throughout the world and with the potential for social instability inside China itself.

Keep a very close eye on China.

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