Asia Briefing: Chinese data glitch may overstate growth

Economists regularly complain that Chinese gross domestic product (GDP) data is not to be entirely trusted, because they believe political manipulation goes on at local level to massage the figures to make them come out in line with what the government wants them to read.

During the disastrous agricultural experiment known as the Great Leap Forward (1958-1960), which triggered a famine in which millions died, local government officials were still producing figures saying that harvests were improving as they feared revealing the true picture would bring down the wrath of Chairman Mao Zedong.

Few economists believe that a similar level of exaggeration goes on today, but a report this month by London-based research house Capital Economics believes that China's economic growth is being overstated by one to two percentage points because of a glitch in the way the data is calculated.

"The flaws are in the calculation of the GDP deflator, the measure of price levels that is used to convert estimates of nominal GDP into real GDP," Chang Liu and Mark Williams from Capital Economics wrote in the report. The glitches means that the official figures exaggerated both the downward pressure on prices in the first quarter and the true rate of economic growth.

By their theory China grew by between 5 per cent and 6 per cent in the 12 months to the first quarter of 2015, rather than the 7 per cent official figure from the National Bureau of Statistics (NBS).

As it is a broader gauge than indicators such as consumer price inflation (CPI) or producer price inflation (PPI), it is seen as a more useful measure of price pressures in an economy.

However, because GDP measures domestic output, arguably the GDP deflator should only reflect the prices of domestically-produced goods and services. This means netting out the price of imports during the calculation of the GDP deflator.

“We are not suggesting that the NBS is deliberately skewing the deflator in order to exaggerate reported growth,” they write.

At times when import price inflation varies markedly from domestic inflation, such as when global commodity prices are rising or falling rapidly, it matters more.

“The GDP deflator exaggerates inflation when import prices are rising, and understates it when import prices fall.”

While the whole thing might sound like a minor technical difference, the failure to net out import price movements when estimating the deflator has major implications.

“If deflationary pressures are smaller than the GDP deflator suggests, there is less justification for aggressive stimulus too. Perhaps most significant, if the nominal GDP data are correct, then real GDP growth was overstated in Q1 by the same amount that the GDP deflator was understated.”

And it's not just happening in China; it is also taking place in other developing countries such as India which use the same approach as China because they lack the ability or capacity to collect the figures needed to track the prices of inputs as well as final outputs.

This will not come as a surprise to the more bearish China forecasters who have long held that Chinese growth is lower than you might think.

The Conference Board’s China Centre believes that Chinese growth was 4 per cent in the period, and Lombard Street Research sees it at 3.8 per cent. However, both of these believe the lower growth has less to do with statistical anomalies that it has to do with China’s broader economic slowdown having a greater impact than it appears.