Commentary: China’s GDP grew more than expected, but is its data reliable?

SINGAPORE: There is some mystery about the Chinese economy right now. Despite a chorus of warnings about China’s economic woes - from the downturn in the real estate sector to subdued household consumption and local government debt - why is its growth rate defying expectations?

Last year, the world’s second-largest economy expanded by 5.2 per cent, higher than the Chinese government’s annual target of around 5 per cent. It surprised expectations again in the first quarter of the year, with a 5.3 per cent growth rate against analysts’ forecast of 4.6 per cent in a Reuters poll.

Consumption and investment drove real gross domestic product growth in China. Even net exports - the difference between exports and imports of goods and services - which dragged on GDP growth rates for five quarters, also added to growth.

This outperformance is difficult to reconcile with the economic challenges facing China. The Chinese housing market struggles to stabilise. Households continue to be shy about consuming, especially on consumer goods and housing-related products. Private sector investment remains tepid and business confidence is still subdued.

How do we explain this contradiction? Can we rely on the government statistics to reflect the Chinese economic reality?

Part of the answer to these questions lie in making a distinction between “real” and “nominal” value.

IS CHINA'S STRONG GROWTH "REAL"?

In economics, the nominal value of a good is its current price. The real value of a good is its relative price over time, usually adjusted for inflation. The difference is important to understand what’s happening in China’s economy.

During inflationary periods, real gross domestic product tends to be lower than nominal GDP because we strip out the effect of price increases to focus on volume growth. Here is a simplified example: Selling 100 cups of kopi at S$1 each will generate revenue of S$100; raising the price to S$2 (assuming the same volume) will generate S$200, but there is no actual growth.

So, real GDP is what analysts and policymakers usually look at because it is more representative of the country’s actual output, unaffected by price increases.

But in China, the pattern has been inverted: Real GDP growth rate has been above nominal GDP for five of the past six quarters. This means that instead of inflation, China is experiencing deflation.

But nominal GDP is important for understanding recent economic trends as inflation may matter in these cases. Moreover, corporates, organisations and governments set budgets based on projected revenues and expenditures in current prices, not inflation-adjusted prices.

There is no denying that China’s economic growth is slowing. China’s nominal GDP growth of 4.2 percent in the quarter from January to March 2024 was notably slower than the annual rate of 6.3 per cent between 2019 and 2023, and less than half of the pre-pandemic pace (between 2010 and 2019) of 10.2 per cent.

CAN WE TRUST CHINA'S ECONOMIC STATISTICS?

Therefore, a perennial question has been: How reliable is China’s economic data?

While Chinese statistics may not be as reliable and detailed as those in the advanced countries, they have been improving in terms of quality and are generally better than many other developing economies.

Recent research by staff from the San Francisco Federal Reserve concluded that Chinese economic data, including GDP, have become more reliable over time.

This means China’s economic statistics are still adequate for understanding the broad economic trends and cycles in the country. There is also an increasingly rich set of private-sector data and sectoral statistics to supplement the Chinese government numbers, and providing a deeper understanding of the economic reality.

As doubts swirl about whether reported data has been manipulated, China’s National Bureau of Statistics is aware of the issues with local government data and has taken various measures to address them, such as using data by separate survey teams to complement data reporting from local governments.

Economists generally agree that China’s economic data is sufficient to provide a reasonable picture of economic development and issues. Digging into the details of the GDP data and supplementing with other economic statistics show a Chinese economy mired in a difficult transition.

CHINESE RECOVERY IS UNEVEN AND DEFLATION PERSISTS

Details of the GDP data reflected an uneven recovery in the Chinese economy, which raises concerns if the current growth is sustainable.

In recent quarters, the manufacturing industry emerged as a key growth driver and construction activity was robust, while the real estate sector continued to shrink. All this is supported by government efforts to direct more financing to the industrial and infrastructure sectors and less to the housing market.

The agriculture and animal husbandry sectors have declined in the past two quarters as there was an excess of supply, leading to price discounts for some food items, such as vegetables and livestock meat, which were the main drivers of deflation.

Average consumer prices fell in the second half of 2023 because of lower prices for food and consumer goods. With consumer demand still subdued and confidence yet to meaningfully recover, deflationary pressures will continue to persist.

What then does deflation mean for businesses and consumers? Falling prices aren’t always a good thing.

It means lower revenue for companies and pushes up debt servicing costs which makes it harder for businesses to invest.

If a Chinese consumer was eyeing a new expensive appliance but believes that it will become cheaper in the coming months, they may hold back on purchases. If more consumers do this, the boost in domestic consumption China is banking on will keep being pushed down the road, causing prices to fall due to oversupply.

FOCUS ON THE LONG GAME

China’s economy is at an important crossroads.

The growth drivers of yesteryear - credit-fuelled investments and export-driven industrialisation - are losing steam.

China is in a necessary transition towards a higher quality development path, and that evolving process will be painful. Chinese policymakers have placed a great emphasis on unlocking “new productive forces”, which is a key part of the push towards the economic transition.

Given China’s importance to the global economy, understanding its development and growth will matter to companies and investors worldwide.

Bernard Aw is Chief Economist for Asia Pacific at Coface.