ON THE face of it, this should be a triumphant day for China. It reported that the economy grew by 6.9% last year, just a shade lower than 2014’s 7.3% pace. That is some achievement, given the turmoil in emerging markets and the sheer size ($10 trillion) of the economy (6.9% growth now yields more additional output than 14.2% growth did back in 2007). But the plunging Chinese stockmarket, the global commodity collapse and downward pressure on the yuan have given rise to a prevalent view that reality is grimmer. If the data are so strong, why are so many people so down on China?
The most obvious answer is that no one much believes the numbers. China has long been suspected of massaging data to smooth its growth trend, under-reporting GDP when overheated and over-reporting it during lulls. Judging by the eerie stability of key indicators recently, China’s statisticians appear to have been doing just that. In year-on-year terms, growth over the past six quarters has been 7.2%, 7.2%, 7%, 7%, 6.9% and 6.8%. Such a tight clustering is improbable. Private surveys suggest that growth was much lumpier last year, with the economy initially soft, then picking up in the final months thanks to stimulus policies. Using a composite of alternative data from electricity usage to car sales, many analysts reckon last year’s growth rate was really 5-6%—not bad, though certainly not as buoyant as the government says.
Headline growth is, however, only the first of the concerns. Look under the hood at the composition of Chinese growth, and the picture that emerges is of extreme weakness in certain parts of the economy. Heavy industry is in bad shape, blighted by overcapacity and falling demand. Service sectors from finance to health care are much more robust. But services, by their nature, are mainly delivered locally; China is able to provide more of what it needs by itself, not through imports. That is cold comfort for other countries, especially commodity producers, which had come to count on ever-stronger Chinese demand. Official data are admirably clear on this bifurcation of the economy: services output grew by 11.6% year-on-year in nominal terms in the first nine months of 2015, whereas manufacturing grew by just 1.2%.
The biggest fear about Chinese growth is that much worse is still to come. Total debt has gone from about 150% of GDP before the global financial crisis in 2008 to nearly 250% today. Increases in indebtedness of that magnitude have been a forerunner of financial woes in other countries. Cracks are beginning to appear in China: capital outflows have surged, bankruptcies are occurring more frequently and bad loans in the banking sector are rising. It is all but certain that more pain lies ahead, though quite how much and how it will play out are matters for debate. If there is one thing all can agree on about China’s economy, it is that the gap between official data and market perceptions has widened to a chasm.
