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Thursday, October 09, 2003

Is China Underestimating Its Growth?

Now here's a strange one, a very strange one. It has become extremely fashionable recently, and especially in the pages of the WSJ (which I'm proud to say I don't read, but which they do tell me about - this reminds me of a piece of UK Wittgensteinology, he reputedly used to start his lectures with things like: they tell me Kant said.......Ok, Ok, so they tell me the WSJ says..........), as I was saying it has become extremely fashionable to say that China's growth is a fiction. This is a strange claim to make, since if China's growth was pretty much an invention of the Chinese Communist Party I can't for the life of me understand why those at the opposite ideological pole (in the US Republican Party) would be taking it so seriously. It is a strange claim to make, but nonetheless it is being made. Clearly, there is, as we have all seen with SARS, a serious problem with using official statistics. But there are other measures. One of these is power consumption. Another is the level of exports, which are a lot easier to measure. A separate question is whether this growth is sustainable. Clearly China's institutional infrastructure has, to say the least, enormous shortcomings. However it is important to note that China's growth is export driven, it is not simply an internal speculative boom. In addition, the rapid shedding of labour from the more-or-less moribund state enterprises means that inflation does not seem to be a present danger. Bottom line: Andy Xie may well be right, and we may even be underestimating the scale of China's growth explosion.

China's economy may be growing much faster than official economic statistics suggest and is in danger of overheating, according to an emerging consensus among foreign and local economists. The economists say a surge in investment, bank lending, construction and car manufacturing has put the Chinese economy on course to grow at about 11 per cent this year, well above official forecasts of just over 8 per cent. "Right now, it is as high as it has ever been," said Jonathan Anderson, of UBS, in Hong Kong.

Using the bank's own system for measuring Chinese gross domestic product, Mr Anderson said third quarter growth was running at 14.2 per cent and would be close to 11 per cent for the year, once the slower rural economy and other factors were taken into account. Few of the economists believe that the present growth rate is either sustainable or desirable for the central government, which is now tightening credit in an attempt to rein in credit growth.

UBS's view is broadly backed by some of China's best-known economists, including Wu Jinglian, of the State Council's Development Research Centre, and Zhang Jun, of Fudan University, in Shanghai. Mr Wu said at a recent seminar that China's growth for the first six months of 2003 was more than 10 per cent, compared with the official figure of 8.2 per cent, and was likely to beat the government's whole-year forecast. Prof Zhang agreed that the official figures were understating growth, saying the figure for GDP could be "bigger than people have expected".

China's official GDP statistics have long been criticised as inaccurate because they do not measure significant parts of the economy, use outdated methods and rely on questionable provincial data. Local officials, used to meeting targets set in a command economy, have consistently reported growth rates that outstrip the national average. The inconsistencies were most glaring during the late 1990s, when official statistics recorded high-speed expansion at a time of falling energy consumption, weak jobs growth and declining prices. This year, however, most leading economic indicators are pointing steeply upwards.

Exports, property and cars accounted for about one third of the economy in terms of their value-added contribution to GDP, said Andy Xie of Morgan Stanley in Hong Kong, and all three were growing by more than 30 per cent. "One third of the economy is growing by about 30 per cent - that's about 10 per cent already," he said. Power consumption, one of the most important independent indicators of Chinese GDP growth, was up by 15 per cent so far this year compared with 2002, Mr Xie added. China's growth rate this year is especially fast in the light of the crisis over severe acute respiratory syndrome, which brought travel and much retail activity to a standstill.
Source: Financial Times

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