Is GDP still a useful gauge of China’s economy?
Zhu Bolong, a coder turned dancer turned entrepreneur, weaved among manicured lawns and minimalist office blocks in a new district of southwestern China’s Chengdu city. He has been looking for a bigger space for his video company.
Initially, office space there went for 60 cents per square foot, he said, but now it’s up to $1. “It’s supply and demand. I think the price is high, but people are lining up to rent. A lot of people say the economy is slowing down, but it doesn’t feel like it.”
China announced Monday that the economy, in the form of gross domestic product, grew 6.3% from April through June compared to the same quarter last year, a faster pace than the 4.5% in the first three months of 2023. Premier Li Qiang gave an early indication last month that second-quarter growth had accelerated and said the economy is on track to expand around 5% for the year.
China usually hits economic targets officials set, no matter what economic conditions are like, and that has raised questions about the accuracy and reliability of Chinese GDP figures.
What is GDP?
The International Monetary Fund defines GDP as a measure of “the monetary value of goods and services” bought by the final user that were produced in a country in a given period. But GDP has its limitations.
“A classic joke in China is that when [a local government orders that a road be built], then some official is unhappy with the shape of certain parts of the road. They [give the] order to scrap the road, and then they ask another company to rebuild the road,” said economics professor David Li at Beijing’s Tsinghua University.
All stages of that process count toward GDP, but they don’t necessarily add value to the economy.
“GDP is not a measure of how much people in the end gain in their happiness [or] wealth,” Li said.
China is not the only country facing questions about how critical inputs and components of output are measured.
“Normally, those debates are very technical,” said Logan Wright at the Rhodium Group, a research firm in Washington, D.C.
“The difference in China is that GDP has taken on a hugely political meaning that is linked to the legitimacy of the Communist Party.”
In the United States, all sorts of output is measured to calculate GDP, whereas in China, officials tend to set GDP targets first, which, critics say, prompts local officials to borrow whatever money is needed to reach the goal.
And many economists believe the numbers are spruced up to overstate growth. Occasionally local officials are punished for falsifying economic data. However, Li said the problems tend to particularly affect China’s quarterly GDP figures, which use data from local governments.
“Whereas the annual data, which usually is corrected in April or May, is more accurate because that is done by the National Bureau of Statistics,” Li said.
GDP reliability
Some economists say China’s GDP figures have become less reliable.
“Namely from 2014 to 2019, Chinese GDP growth barely moved at all, just a little over 1.5 percentage points for six years,” Wright said. “We can never find another major economy, particularly one of that size, where GDP had been that stable over time.”
In the meantime, he said, China’s interest rates were going up and down, commodity prices collapsed and credit conditions tightened, yet none of that volatility showed up in China’s GDP.
“In 2023 it’s an even more questionable story that China’s economy is growing at 5% or faster,” Wright said. “It’s hard to know what exactly is accounting for that growth.”
However, some economists believe that a 5% GDP target is entirely possible — technically speaking.
“When you measure Chinese GDP, you will always have a base year. The base year is the previous year,” Li said.
In 2022, all the COVID lockdowns and mass testing tanked the Chinese economy to a reported 3% growth. “So, 5% GDP growth for today’s Chinese economy against a very bad 2022 year is an easy target,” Li said.
Not everyone buys that argument.
“What’s overlooked is that the reasons [China’s economy was] weak last year are still happening this year, particularly the property sector,” Wright said. “The property sector is still declining … and still dragging on growth.”
Property accounts for roughly a quarter of China’s economy. According to Reuters’ calculations, property sales by floor area dropped 28.1% in June on a year-over-year basis after they fell 19.7% in May.
On the streets, China’s economy certainly looks like it is recovering. In Chengdu’s Taikoo Li commercial area, crowds form in front of luxury retailers like Dior and Gucci. Household consumption is growing too — but not fast enough.
“Until now, we do not have a better measure of economic intensity,” Li said. “So, let’s settle with GDP. Use it as a rough proxy of how the economy is working.”
He added that investors should also pay attention to emerging sectors like new energy and changes in government policy for clues to the health of China’s economy.
Wright agrees that it is important to pay attention to what Beijing is doing.
Central government officials “are cutting headline policy interest rates to stimulate credit demand. They’re talking actively about the need to restructure local government debt to put local governments on a firmer footing,” Wright said. He added that Beijing is also considering other stimulus measures, contradicting what officials would be expected to do if an economy was growing at 5%.
The health of China’s economy
“The truth is that China is now being hit by a very significant structural slowdown,” Wright said. “That slowdown started alongside the weakness in credit growth in 2018 and 2019. It’s now been intensified with the COVID restrictions” of the past three years.
Li agrees China’s economy is weak right now, but he said it still has a lot of potential.
As for entrepreneur Zhu, he is still looking for a bigger office space for his business but he has cut back on spending for himself.
“It’s not that I don’t have the money in my pocket, but the mindset has changed. I’d prefer to save to survive in the longer term.”
He compared it to hoarding food for the winter, even if the GDP figures hint at brighter days ahead.
Additional research by Charles Zhang.
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