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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15 months have gone since the important strategic meeting of the – then – new Chinese political leadership (Third Plenum). 16 important reform areas were presented with totally 60 more detailed subareas – most of them linked to economic policy and more social well-being. In the year 2020, the results of the reform policy are intended to be checked. In 2022 a new political generation will come into power.

But what happened in reform policy during 2014? It is certainly not easy to check out reform achievements. Certain policy steps/measures are more long-term oriented and hard or impossible to recognize in the short run. In other areas – like the financial sector – many changes and improvements are added to each other and can be (theoretically) more easily analyzed. But even in this context, it is difficult to get a fair picture of what has been done.

After having daily studied economic news from China during 2014, I come to the conclusion that China last year de facto has entered a new era of economic reform policy. However, it seems to be hard or even impossible to evaluate Chinese reform policy/measures more exactly. Most direct references are linked to the cautious, market-oriented changes of the financial sector. But usually, analysts just find the fragments and remain, consequently, without helicopter view.

Transparency must increase! This would give China more appreciation and encouragement for the structural reforms that are indeed taking place – despite many times lagging speed and – may be – effectiveness.

Let’s, for example, look for a moment at the financial sector. Many – mostly small but necessary – reform steps have been taken in the last year. These reform steps were published and available also for foreigners; I have noted these changes myself. However, it seems to be impossible to find an illuminating and detailed summary of all the financial reforms – preferably separated in the domestic and the cross-border financial business.

Consequently, I would regard as a good idea if the official China could establish a website where all concrete economic reform steps or measures are summarized in line with the reform agenda from November 2013, covering, for example, the financial system, the environment, infrastructure, state-owned enterprises, municipalities, etc. – certainly provided with continuous updating.

This would be a good contribution and an easy way to (some) more transparency – based on published reality. China itself and the rest of the world would benefit from simple innovations like this.

Hubert Fromlet
Senior Professor of International Economics, Linnaeus University
Editorial board

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In May 2012, I shared a prediction in these pages about China becoming the largest consumption market for PCs (notebook PCs plus desktops) in the world, surpassing the United States plus Canada market by year’s end. In this essay, I will share estimates that China did indeed fulfill this expectation but then experienced the same slowdown in PC purchases that affected the US plus Canada and most of the world markets in 2013. My source will be Intel Corporation estimates, for which I thank Intel but which do not necessarily represent Intel’s positions, strategies, or opinions. Our best data estimates and empirical studies suggest that the slowdown in PC sales was principally caused not by the absence of strong economic growth but instead by competition from media tablets such as Apple’s iPad and smartphones such as Apple’s iPhone and Samsung’s entries as well as cheaper competitors.

In any discussion of Information and Communication Technology (ICT) numbers, it is important to recognize the imprecise and inferred nature of any numerical estimates. Agreement on historical “actuals” is as hard to reach as agreement upon forecasts. I have joked in public forums that the Information Technology (IT) industry is not very good with information but this is, in fact, true and is a testimony to the dynamic nature of the industry in which new usages of new devices sell through rapidly changing distribution channels and keep observers and users second-guessing history and trends. In this note, the reader is advised to keep the limitations of the data and the speculative nature of estimates and forecasts in mind.

In the first year for which Intel has fairly complete historical estimates, namely 1995, US plus Canadian sales of PCs were approximately 26 million units while China sales were about 2 million units. By 2011, sales figures had nearly converged with US plus Canadian sales of 78 million units and China sales of 75 million units. The incredibly fast growth of the emerging China markets relative to the growth of the established US plus Canada market made my earlier prediction of crossover by the end of 2012 seem safe. And, in our best estimate, 2012 sales were indeed greater for China than in the US plus Canada market. China’s sales figures grew to 77 million while the US plus Canadian markets contracted to 71 million. By 2013, US plus Canada sales had fallen to 68 million and China had experienced a contraction in sales to 71 million. When I predicted crossover of sales figures by the end of 2012, it was with the expectation of continuing growth in PC sales in both markets with China rates exceeding US plus Canada rates. Instead, the US plus Canada market contracted in 2012 and 2013 and the China market contracted in 2013.

Both markets had their own economic challenges in 2012 and 2013 continuing into 2014 and these problems certainly limited PC sales. In both geographies, our econometric models continue to show strong income elasticities in both consumer and business markets so stronger economies would almost certainly have led to higher PC sales. The main cause of unexpectedly low PC sales, however, was probably the advent of a new device competing with notebooks and desktops, namely media tablets. The Apple iPad launched in April 2010 to great fanfare. By the end of the year, competing Android tablets were gaining share and tablet sales had reached 8 million in US plus Canada and 1 million in China. In 2011, 2012, and 2013, tablet sales in US plus Canada were estimated to be 28 million, 51 million, and 61 million, respectively. For the same years, China sales were estimated to be 8 million, 22 million, and 38 million, respectively. All of my earlier warnings about the imprecision of estimates of purchases apply even more strongly for tablets due to the rise of a broad network of tablet design and manufacturing houses and factories in what is called the “China tech ecosystem” (CTE) centered in Shenzhen.

CTE-produced tablets are sometimes made for multinational corporations well known in PC markets and sometimes badged with local and changeable names. The early CTE tablets were generally much cheaper and probably of much lower quality than the market leading tablets sold by Apple and Samsung. Some were probably uncounted in surveys that missed the smaller, less central manufacturers and others might have been double-counted if reported both by the CTE shop and the brand name customer of that shop. Nevertheless, it is highly probable that tablet sales displaced millions of PC sales and led to contractions in unit sales in both the US plus Canada market and the China market. Given the numbers that I’ve shared here, you can also see that the market for tablets has been strong enough in the US plus Canada relative to China’s tablet market to keep China from catching up in combined PC plus tablet sales. In other words, while my 2012 prediction published here was technically correct, it was not true when tablets were included.

The question, then, is whether tablets should be included in an expanded view of PCs. Our marketing, ethnographic, and economic research at Intel lead us to conclude that tablet sales have indeed displaced millions of PC sales. The most likely story is that tablets are quite suitable for email, social networking, browsing on the Internet, and for movie and music enjoyment. They may eventually achieve parity or superiority for other purposes but for most office work, including creation of long texts, spreadsheets, and presentations, PCs still seem superior. I am writing this essay, for example, on one of the new “two-in-one” notebooks that function as both PCs and tablets. Furthermore, I am doing this entirely in the PC mode although I keep two tablets and a smartphone nearby for further support.

Ironically, just as industry observers and participants are now almost all convinced that tablets have displaced millions of PCs, we may be witnessing the eclipse of tablets by the last year or two of sales of so-called “phablets”, that is smartphones with screens larger than 5 inch or 5.5 inch when measured diagonally. The category of phablet was first apparent with the success of the Samsung Galaxy Note smart phone with a 5.3 inch screen in October, 2011. Later Note models have grown in size to a 5.7 inch screen while Apple has now joined the fray with its 5.5 inch iPhone 6+. In Intel’s latest market research we see evidence that approximately 25% of US homes and 30% of China households already own a phablet. Evidence arrives regularly in both our own research and in third party research that phablets are now displacing sales of the smaller, 7 inch tablets. Smaller smart phones with less than 5 inch or 5.5 inch screens continue to sell in hundreds of million units worldwide both due to some savings on smaller phones and the difficulty of using too large a phone with one hand or for voice phone calls. Nonetheless, the market has pivoted again making the job of tracking and forecasting ICT uptake as challenging as it has ever been.

The proliferation of tablets, two-in-one PCs, and smartphones as well as “all-in-one” desktops (exemplified, as usual, by a successful Apple product, namely the iMac) has created great interest in understanding the “multi-device” household. Here is what we think we know about US and China households. Our monthly surveys of households in the US and in China show that about 90% of American homes own at least one PC, about 70% at least one smartphone, and about 50% at least one tablet. About 60% of China homes own at least one PC, about 80% at least one smartphone, and about 10% at least one tablet. Hence the US consumer segment is PC-centric while the China consumer segment is smartphone-centric.

Looking at the intersection of ownership of various devices, 44% of American households own PCs, tablets, and smartphones. With only 10% of China households owning tablets, it is not surprising that only 8% of China households own PCs, tablets, and smartphones. Looking at the ownership of multiple PCs, multiple tablets, and multiple smartphones further highlights the differences in ownership patterns between US and China households. Of 27 possible patterns of ownership of zero, one, or two or more PCs, tablets, and smartphones, the most common configuration in the US is ownership of two or more of all three devices. One in seven US households fall into this category in the latest surveys, a frequency that has been and will probably continue increasing.

The most common configuration in China households is one PC, no tablets, and two or more smartphones owned by more than one in four households while less than one in a hundred households own two or more of each of the three devices. When interviewing respondents in both countries, the Intel monthly survey includes questions about current ownership patterns as well as past. From our survey data we can see that most transitions among US and China households involve increasing the number of smartphones from none to one or one to two or more. Other questions suggest that a favored purchase by new smartphone customers is the larger screen smartphone phablet while tablet household penetration seems stalled, at least temporarily, at its current rate of slightly more than 50% in the US and slightly less than 10% in China. It seems likely that phablets are now displacing tablets just as tablets displaced PC sales.

US and China households exhibit wide differences in their current ownership pattern but similar movements to phablets, although most of the growing US adoption of phablets comes as additions to PCs and tablets while a significant portion of the phablet adoption in China comes as first device ownership.

Paul Thomas
Chief Economist, Intel

The views in this article are my own and don’t necessarily represent Intel’s positions, strategies, or opinions.