How to evaluate China’s economy

Key Points

• Official Chinese economic data are often the only game in town, but they are untrust­worthy. Sometimes they prove inaccurate; during downturns they are falsified outright. Finding inconsistency in official statistics demonstrates the problem but offers no solution, since it is rarely clear which series is better.
• Examining 15 major indicators for importance and reliability shows that growth in gross domestic product (GDP) and GDP per capita should be deemphasized. To illustrate, China’s GDP per capita is twice as high as official per capita disposable income. The latter can be spent; the former is an accounting result.
• Another conclusion: Arguably the most valuable indicators are the worst measured. Debt is reasonably estimated at present, but factor productivity and human capital are vital to medium-term performance and receive far too little attention.

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Introduction

This is not a report on how China’s economy is doing. It is a much more difficult report on how to determine how China’s economy is doing. At the time of writing, the rough consensus is Chinese economic performance is weakening. If so, is it a temporary, cyclical downturn or a sustained, structural downturn? Will further stimulus address the downturn, or does it require fundamental reform of some kind?

Chinese President Xi Jinping arrives ahead of the Asia-Pacific Economic Cooperation (APEC) Summit, in Port Moresby, Papua New Guinea, November 15, 2018. Reuters

Such questions never seem to be resolved for long, and they understate the problem. How can we be sure the economic performance of the People’s Republic of China (PRC) is indeed weakening in any meaningful fashion? Do we know the true situation a year ago? Five years ago? Twenty?

The obvious premise of the report is economic data published by the Chinese government are untrustworthy. There will be an attempt to demonstrate this but the effort may be pointless. Chinese government data will continue to be widely used because some users want to believe they are accurate but more because there is little choice, which is how the Communist Party likes things. While some figures can be calculated by independent actors, the level of detail provided by the central government cannot be matched by anyone else.

The quality of available numbers indicates these guidelines:

1. Deemphasize gross domestic product (GDP) and GDP per capita,
2. Turn more often to personal income and aggregate debt, and
3. In the longer term, upgrade measurements of factor productivity and human capital.

Doing one or more of these things will not yield a simple picture to guide policy or finance. It will, however, prevent more of the egregious mistakes that have been made to date regarding the direction and nature of China’s economy.

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