Business Spectator

The Truth about China's Lies and Statistics

Senior Fellow
China's Premier Li Keqiang speaks at the Great Hall of the People on March 13, 2014 in Beijing, China. (Feng Li/Getty Images)
China's Premier Li Keqiang speaks at the Great Hall of the People on March 13, 2014 in Beijing, China. (Feng Li/Getty Images)

It is well known that China’s official growth statistics are highly unreliable. Premier Le Keqiang once told the American ambassador at the time that official statistics were ‘man made’ (read ‘made up’) and ‘therefore unreliable’, and that the only reliable indicators are electricity consumption, volume of rail cargo and loan disbursements.

If we follow this so-called ‘Keqiang Index’ (KI Index), then China’s GDP growth is under 6 per cent, rather than the official 7.4 per cent, which is unsurprisingly very close to the government’s official growth target of 7.5 per cent.

Readers might offer a disinterested sigh. After all, official growth in 2007 reached 12 per cent, while the KI Index said no more than 9.5 per cent. In 2012, the official number was around 7.5 per cent, even if the KI Index said just over 5 per cent. China is still the second largest economy in the world -- and growing damn fast, right? So who cares about a couple of percentage points here and there? Shouldn’t we leave that to the economic historians to iron out in a future time?

Well, when economies are growing rapidly and increasing their rate of growth, a few percentage points here and there are probably not that important. So whether it was 13.5 per cent or 12 per cent in 2010 doesn’t really matter.

But when the growth rates of an economy with a still very low per capita GDP (ranked around 90 in the world in between St Vincents and the Grenadines above it, and Namibia beneath it) is slowing or struggling as many (including this author) suspect, then such inaccuracies matter more for a number of reasons that I will shortly go into.

First, what does the KI index say?

It says that growth in the middle of 2011, 2012, 2013 and mid-2014 was about 12 per cent, 6 per cent, 6 per cent and 5 per cent, respectively. This compares to official growth rates in the same period of about 15 per cent, 7.5 per cent, 7.5 per cent and 7.4 per cent respectively. In other words, the KI Index indicates a clear slowing trend of less than 6 per cent.

In China’s case, whether it is growing at the government target of 7.5 per cent or closer to 5.5 per cent matters for the following reason. As all economists know, there are three things that can grow any economy: more capital, more labour, or using one or both more efficiently.

We all know that China has been throwing massive amounts of capital into its economy, especially since 2008, which technically increases GDP growth in the form of additional investment. But the economy generally gets plaudits for massive increases in labour productivity.

To wit, while labour productivity in developed economies such as Germany, France, the US and UK grew at only 0.4 per cent, 0.3 per cent, 0.9 per cent and 0.5 per cent respectively in 2013, emerging and developing economies enjoyed average labour productivity growth of 3.3 per cent in the same year. China was the star, boasting labour productivity growth of 7.1 per cent in 2013.

This is just as well since total factor productivity (TFP) growth in China, which measures the growth not resulting simply from additional capital or labour inputs (i.e. using capital and/or labour more efficiently) was non-existent. In other words, GDP growth was really just a function of increased fixed investment (which we know is not sustainable in China’s case) and gains in labour productivity since we know that labour inputs are not significantly increasing in the Chinese economy.

Let’s get back to GDP growth: If growth is actually 5.5 per cent rather than the official 7.5 per cent, a different economic story emerges out of China over the past few years.

According to official estimates, TFP added around 3.14 per cent of GDP growth in 2013, compared to 3.5 per cent by fixed investment, and 1.15 per cent by additional labour inputs. If growth was actually two percentage points lower at 5.5 per cent, and we were to make a proportionate reduction for the contribution to GDP growth by all three components, then TFP contributed about 2.3 per cent to GDP growth in 2013.

Given that almost all (if not all) of TFP gains in China in 2013 were from labour productivity rather than capital productivity (which may even be declining), then we can hypothesise that labour productivity in 2013 grew at just over 5 per cent rather than over 7 per cent.

But official statistics on capital inputs are likely to be underestimated if anything while labour inputs figure tend to be fairly close to the mark. This means that if growth was actually only 5.5 per cent in 2013 rather than the official 7.5 per cent, TFP needs to be trimmed more than the proportion-based approach above has done. If the 2-per-cent-lower GDP growth figure is largely accounted for by a reduction in TFP -- mainly a downgrading of labour productivity -- then Chinese labour productivity gains in 2013 are likely to be closer to labour productivity gains in countries such as Malaysia, Vietnam, the Philippines and even India.

The same analysis can be applied to the period 2012, as the discrepancy between the official numbers and the KI Index is similar. If so, this means that almost all of China’s superior economic growth is likely down to higher capital inputs alone. We all know the problems associated with that approach.

So think about what this means for China. It still has a very low GDP per capita and over one quarter of its people live on less than $US2 per day. Over 100 million are still below the poverty line figure of $US1.25 per day. Its debt-to-GDP ratio is over 200 per cent, and the fixed investment model is running out of steam. As its population ages, increases in labour productivity are the main hope for sustained growth. The trends may not be disastrous, but China is becoming a ‘normal’ economy with abnormally big problems.