China Research

In the last China Research issue, Hubert Fromlet shared his thoughts on the tricky issue of China’s GDP data reliability. Since then, GDP data for 2014 has been officially announced: 7.4 percent. International media have commented this negatively, with the argument that this growth rate was lowest in 24 years. One might argue that the real tragedy about this number is the only tiny deviation of 0.1 from the growth target propagated in early 2014 and in our lack of trust in this result. Why all the talk about upcoming lower growth, why introducing the hardly attractive concept of the “new normal” state of China, if the target was just failed by 0.1 percent? Have the sinister news of the last months just been some spinning efforts to make 7.4 bad enough, but still credible? Has growth actually been much lower, as Hubert Fromlet’s analysis suggested? Are we back to a situation like in 1998?

In that year, the Chinese government had propagated a growth target of 8.0 percent, a target that was soon threatened by the repercussions of the Asian financial crisis and the huge floods hitting several provinces around the Yangzi during that summer. The government reacted by stressing the dedication to still achieve the 8.0 growth target. The official growth rate of that year was later published as 7.8 percent, arguably a very Chinese effort of “spinning”: Less than the target, thereby increasing the credibility of the number, but still close enough to satisfy internal and external expectations. Economists, both in and outside China, questioned the reliability of these data. The American China economist Thomas Rawski later become famous for his reality check on the GDP data by using alternative measures for growth based on energy, traffic, real estate etc. statistics. The results were devastating, indicating growth rates of around 2.0 percent for China’s economy for 1998 and following years. When his conclusions started to be circulated in popular international media, Chinese media started a counter propaganda strike, questioning the methods of Rawski’s analysis.

Only few years later though, when – in the course of the more recent leadership change – Chinese media tried to stress the economic competence of Li Keqiang, they repeated a story of him questioning reported provincial GRP (gross regional product) data. He was said to use alternative indicators instead to get a realistic picture of provincial economic development, indicators that surprisingly resembled those of Thomas Rawski.

So, are Chinese GDP data just deliberate fabrications? Probably not: There exist a number of technical reasons why Chinese statistical data are troubling, some of which are difficult to avoid: First, China’s gradual economic transition necessitates a gradual adaptation to the internationally practised System of National Accounts (SNA). Progress in this transition, for example by including the service sector into the reporting system, explains a lot of changes in Chinese statistics over the last 35 years. Second, China’s fast growth regularly necessitates adaptations of the units of analysis. For example, if it were appropriate to count gross capital investment above 500,000 Yuan in the 1990s or early 2000s, with investment volumes continuously on the rise such investment projects today are only counted if they exceed 5 million Yuan, leading to a one-time decrease in growth rates of FAI in the year when the adaptation was initiated (2010).

But still, there has been an element of fabrication in GDP data in the past that until today feeds our suspicions: Chinese GDP data is regularly published in the China Statistical Yearbook. Each yearbook publishes the latest nominal GDP data as well as nominal and real GDP growth. Past data for nominal GDP is corrected in the current yearbook if necessary. In most cases since 1992[¹] (YB 2005, 2007, 2009, 2011, 2012, 2013, 2014) these ex post corrections only pertain to the previous year GDP, but in several years (YB 1996, 2003, 2004, 2006, 2008 and 2010) backward correction of nominal GDP data was undertaken for a number of years. The most substantial corrections of this kind happened with the Yearbook of 2006, when – based on a new census – nominal GDP data was corrected back for the years 1992 to 2005. At the same time, real GDP growth rates have seldom been corrected backwards. Only in the YB 2005, 2007 and 2011 could such backward revisions be observed with the most substantial revision for a long time series undertaken in the YB 2011. In economic terms, revising nominal data without adjusting real GDP growth accordingly implies that the implicit GDP deflator (China does not publish a GDP deflator, but also does not use the published consumer or producer price index as deflator) would have to be corrected accordingly. This again assumes that the flaws in original GDP data and the GDP deflator were of the same scope. Such an assumption is hardly convincing from an economic perspective.

To give an example: GDP nominal growth in 2009 according to the data published in 2010 was 13.2 percent, according to later revised nominal data it was just 8.6 percent. Real growth rate for that year is assumed to have been 9.1 percent according to the Yearbook 2010, which was revised to 9.2 percent in the Yearbook 2011. Thus, while the correction of the nominal growth rate was 4.6 percentage points, the correction of the real GDP growth rate was only 0.1 percent. Thus there must have been a major correction of 4.5 percentage point to the implicit GDP deflator!

In the years since 2010, backward revisions of nominal GDP have been comparatively small. This could indicate that GDP data has become more reliable. The problem is that we don’t know for sure. Following the logic of Chinese politics major corrections of GDP may have been deemed inappropriate in times of the global financial crisis and Chinese leadership change. If we assume this logic to be relevant, simple alternative calculation will not work anymore: If the Chinese Premier used alternative calculations in the past himself and if the Chinese leadership today really wants to cook the books in order to persuade Chinese and foreign observers that GDP data may go down, but only slowly so, the leadership would also know how to do the trick more convincingly than in the years around 1998.

It’s a real dilemma: How can the Chinese leadership reinstall trust in the numbers after they have themselves shown their distrust in past reporting? And how can we regain trust in today’s data after there have been so obvious flaws in the past? To me, the Chinese government has not to put efforts into explaining that lower growth rates may be the “new normal” situation for China. It would be much more helpful if the “new normal” stood for transparency and reliability of media and data.

[¹] The calculations presented here are not looking into the years before 1992.

Doris Fischer
Professor, University of Würzburg, China Business and Economics

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For years, China has been discussing the necessity to enter a new growth path. Originally, the discussion arose from economists’ warning that China’s growth will not be able to rely on cheap labour and exports endlessly as population growth slowed. The thrust of the argument at that time was that China had to shift to a more knowledge-based, innovation-driven development path or, in other words, should shift to higher stages on the global production chains. The warnings seemed increasingly plausible when wages rose in Southern China due to a lower flux of migrants and the impact of the new labour law of early 2008.

Later, representatives of the US government, amongst others, pressured China for supporting local demand as part of the global remedies against the global financial crisis and China’s huge trade surplus with the United States. China’s export-driven growth model was said to be unsustainable, as it contributed to global imbalances and exposed China to too much risk. Hence, China’s stimulus package, announced in late 2008 and implemented throughout 2009 and 2010, was lauded internationally. The stimulus package did trigger an investment boom, even though, as was to be expected then and has become obvious today, it created substantial follow-up problems. At any rate, the contribution of final consumption to GDP did not change significantly. As far as there was a tiny increase in final consumption to GDP this resulted from government consumption, not household consumption.

The discussion about a necessary change in China’s development path again gained traction in the months before the Chinese leadership change. This time the discussion expanded against the background of local government debts, declining profitability of state-owned enterprises, fluctuating exports and ever increasing environmental problems that were perceived as a result of the stimulus package and the investment-driven development path of the last decade. Different visions, hopes and interests led to the common expectation that the new Party leadership under Xi Jinping would initiate substantial changes in economic policies. In this context, China’s need for a new growth path again was linked to the idea of a consumption-led growth model. Triggering consumption at home would lessen export dependence, stabilize GDP growth etc.

Most recently the March session of the National People’s Congress has confirmed this line of thinking. For example, the recently propagated “2014-2020 new urbanization plan” states that “domestic demand is the basic force of our economic development and the largest potential for expansion of domestic demand lies in urbanization”.

So, it seems as if China’s future growth path is expected to be urbanization driven and therefore demand driven. Does this mean that the early experts who called for a new growth path can be happy because their warnings are finally understood? Can the US exult because finally the trade balance will tilt to their favour? And can the Chinese government look forward to a new growth impetus that helps overcome the problematic legacy of the stimulus package? I think it is too early to be that optimistic.

First, the remedy is not new. Last time the Chinese government grasped to an urbanization strategy for solving economic problems was at the end of the 1990s when the introduction of private ownership of housing led to a surge in urbanization, real-estate investment and – for about three years – an increase in the consumption to GDP ratio. While this indicates that the new industrialization strategy may indeed contribute to domestic consumption, the recipe as such would not be new and the impact may not last long.

Second, past experience is that public investment tends to increase in the years after a leadership change. Against this background, the urbanization programme can also be interpreted as an invitation to local government to invest in real estate programs, city and infrastructure development etc. It would still be a development path driven by investment. This may not be the intention of the central government but it is a likely outcome.

Third, the challenge remains to find occupation for the new urbanites. Where will they work? In the service sector or in labour-intensive production? We do not know, yet. Whatever the development will be, it will influence the growth path. Last but least, the vision of consumption-led growth still implies that the products for consumption have to be produced somewhere. This could be in China, it could be abroad. In any case, the problem of the environmental impact of global consumption pattern that has led to China’s environmental problems, will not be solved by China following a US like consumption-led growth model.

Doris Fischer
Professor, University of Würzburg, China Business and Economics

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These days we observe the transition to a new government in China, which will be endorsed by the National People’s Congress. The renewal of the government follows the election of a new Party leadership last November. Since then, all kinds of speculations and discussions have emerged concerning the expected ideas and potential political targets of the new Party leadership. Obviously some emphasis will be put on fighting corruption. But will their also be changes in economic policies? Will new ideas regarding the appropriate economic governance emerge? How will the new government handle state-owned enterprises? How much influence will the central government excise on large enterprises? How will it treat the tendency of local governments to intervene in and interlock with local business?

We do not know the answers yet. So let me look into a specific sector to highlight the questions at hand… and the degree of obscurity we still have to face.

Just a few days before the opening of the NPC meeting, the State Grid Corporation published a document called ‘Opinions regarding our services to smoothen grid integration of decentralized electricity generation’. What may appear to be a minor document is just the latest step in a wave of support initiatives for an ailing industry: the solar energy sector.

There are some interesting things that can be learned from reading these ‘Opinions’ in the context of the politics of the last months:

– The ‘Opinions’ confirm – just a few days before the new government steps in – a policy direction that was prepared over the last year. The 12^th FYP for the solar energy manufacturing sector endorsed in February 2012 as well as the 12^th FYP for solar energy electricity generation propagated in July 2012 both already announced support for decentralized solar PV use and grid integration. Hence, whatever the changes are at the leadership level, at the more concrete policy level, we can observe continuity at least over the last twelve months. The idea to support the ailing solar industry by pushing for decentralized installations was a highly contentious issue before 2012, but has survived the political struggles of the last year. So, either the new leadership already had considerable influence at that time, or the differences between the new and former leaders are not that big at all.

– The ‘Opinions’ substitute a document called ‘Preliminary opinions regarding our services to smoothen grid integration of decentralized solar energy electricity generation’ published in October 2012. Between October and late February the wind energy and other renewable energy sectors have managed to enter the ‘Opinions’ and therefore to secure the favourable service conditions originally promised by State Grid Corporation only to solar-based electricity generation. At the same time the promised speed of services was somewhat reduced. This demonstrates several characteristics of policy making in China today: First, rules and regulations are often initially published in a preliminary version in order to allow for experiments and later corrections. Second, changes to the preliminary versions actually happen. Third, a considerable degree of lobbying seems to occur in this process. Again, this hints more to continuation than change in Chinese economic policy making.

– The ‘Opinions’, published by the State Grid Corporation, document better coordination between different ministries and actors in energy policies. Past policies and instruments to support the national solar industry are said to have suffered from the absence of support by the State Grid Corporation. As the ‘Opinions’ follow the ideas advanced in the sectoral 12^th FYPs of the Ministry of Industry and Information Technology and the Energy Department of the NDRC respectively, it seems that this time the State Grid Corporation was better integrated into the policy making process than before. Allegedly State Grid was not consulted for the design of the ‘Golden Sun’ policy, which was initiated in 2009 to bolster PV deployment in China, and therefore did not support implementation actively. So, the ‘Opinions’ may indicate a better handling of a big power player like the State Grid. However, it also confirms the powerful position of State Grid with regard to energy policies.

– The ‘Opinions’ promise that State Grid will cover most of the grid integration costs for renewable energy projects apart from the investment in the renewable energy technology as such. It will also allow for separate measurement of the electricity used and the electricity fed into the grid by the installer. While the former will obviously lessen the overall investment costs and the latter will provide a service needed to calculate decentralized electricity generation, so far the electricity prices or, more accurate, the level of subsidies paid for solar PV electricity generated by decentralized projects have not yet been defined. Therefore, as in the past, it is unclear whether the new policies will trigger a substantial investment wave in the national market.

There seems to be more continuation than change to be discerned from this example. There is support for local solar energy deployment, but it still is half-hearted. And, alas, the impression of continuation is confirmed by Chinese media reports complaining that these and other initiatives to support the local industry are designed in a way that favours state-owned and state-backed companies in the solar manufacturing sector. In the past the Chinese solar manufacturing industry excelled in international markets mainly due to the success of private enterprises. In contrast, the low level of regulatory transparency, like the lack of a clear rule on subsidies, in the promotion of the solar energy at home, implies a policy bias toward state-backed companies. These can take higher risks and receive investment support from local banks even in situations where the investment environment is volatile and the expected return on investment is questionable.

In sum, for the time being we should expect major changes and reshuffles in the Chinese solar sector as a result of a high level of continuation in the general course of economic policies.

Doris Fischer
Professor, University of Würzburg, China Business and Economics

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