Friday, August 16, 2013

China's economy won't overtake America's anytime soon

China's economy won't overtake America's anytime soon

A construction site for a highway near the International Finance Center in Hong Kong.
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A construction site for a highway near the International Finance Center in Hong Kong.

The Week

Some economists project China could swipe the crown as soon as 2016. But there's a big problem: We can't trust Chinese GDP data. Back in the 1960s, economists were confident that the Soviet economy could overtake the economy of the United States by the year 2000. This chart — projecting huge Soviet growth — originally appeared in the 1961 edition of Nobel-winning economist Paul Samuelson's textbook:

(Courtesy of Marginal Revolution)
Of course, the Soviet Union never achieved such high growth levels. When the Soviet Union fell apart in 1991, its economy was barely half the size of America's. Why did projections of huge Soviet growth turn out to be so wrong? Renegade Soviet economist Girsh Itsykovich Khanin argued that the growth rates reported by Soviet authorities were hugely overestimated. While official estimates put the Soviet economy of 1985 at 84.4 times the output of 1928, Khanin estimated that in reality it was only 6.6 times the 1928 output. Bad data from the Soviet authorities led economists like Paul Samuelson to make bad projections.
While there are no projections that today's Russian economy will overtake that of the United States, many economists are projecting that China, which has experienced three decades of 9.8 percent average annual GDP growth, is poised to trump America's economy. According to the Chinese Academy of Sciences, the Chinese economy is set to overtake the of United States by 2019. According to the International Monetary Fund, China could overtake the U.S. as soon as 2016.
On its face, this seems at least plausible. Yes, America's GDP is still roughly twice as large as China's. But China has become a global hub of trade and manufacturing, and Chinese central authorities report a current growth rate of 7.5 percent. That's down from 7.8 percent in 2012, but is still a vastly higher rate of growth than Western democracies like the United States, Britain, and France can boast.
Still, many say that the Chinese economy is suffering from the same problem as the Soviet Union — misreported or manipulated data. Here's Gordon Chang of Forbes:
What is the real growth figure? Seeking Alpha thinks it is around 6.7%, but even that figure is high. Among other factors, the severe contraction of aggregate financing in June, the marked fall in exports in May and June, and the evident shrinkage of the manufacturing sector throughout the quarter all point to an economy growing in the low single digits.
Moreover, it is unlikely that the National Bureau of Statistics, in releasing the Q2 number, had made proper adjustments to account for two phenomena. First, Beijing's official statistics have not been adequately adjusted for inflation, as Standard Chartered's Stephen Green has pointed out. Second, fake trade invoicing substantially inflated GDP numbers. Rampant falsification has resulted in the simply unbelievable report of 14.7% export growth in April, the first month of the just-ended quarter. Although some say export growth was about 6% then, it seems like it was actually closer to 3%. [Forbes]
There are further inconsistencies in the Chinese GDP data. This chart, via Yueran Zhang of the Atlantic, shows that every Chinese province is reporting higher GDP growth than the national average.
Data that doesn't add up smacks of manipulation. Michael Pettis at the Financial Times says thatChina — in the face of weaker global demand for its manufacturing output and rising Chinese wages — is hitting the rocks of rebalancing its export-driven manufacturing economy toward domestic consumption:
Simple logic shows that it is nearly impossible for China's GDP to grow at current rates while rebalancing away from its dangerous over-reliance on exports and debt-fuelled investment. Consider what it means for China to rebalance. Household consumption, at an astonishingly low 35 percent of GDP, is just over half the global average.
Attempts to engineer a rebalancing that lifts consumption over the next 10 years to, say, 50 percent — which will still leave it with the lowest consumption share of any large economy in the world — would require consumption growth to exceed GDP growth by close to 4 percentage points every year. So an average annual GDP growth rate of 6 or 7 percent requires average growth in consumption of nearly 10-11 percent for a decade for China to rebalance meaningfully.
China was not able to achieve such high consumption growth rates even in the best of times, when it and the world were growing much more briskly, and it will prove near impossible for China to manage such high consumption growth under much weaker Chinese and global conditions. [Financial Times]
While the Chinese economy is unlikely to be facing a Soviet-style collapse — it really is a hub of global manufacturing, and the global number one in imports and exports — it could be in for some rocky years ahead as its economy rebalances to consume more and manufacture less. So, like the Soviet Union, all of those projections of China soon overtaking America may come to nothing.
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