China’s Economic Conundrum

Better Measurements of China’s Economic Growth Picture

China is desperate for global clout of the economic, political, and military varieties. China’s future prospects rest upon China’s economic growth, but reliable figures for China’s true growth are difficult to come by, even for China’s leaders.

The Conference Board Measurements Cut Through Some of the Smokescreen

We know that the Chinese Communist Party has been overstating China’s economic growth and productivity for several years now — at least since the 2008 global deleveraging. Better estimates by reputable outside groups place China’s GDP growth close to 4.5%, rather than the nearly 7% figure provided by Chinese government officials. China’s boom times are over.

A broader look at Chinese economic growth comes from a respected international group of over 1200 member companies established in 1912, known as the Conference Board. In the Forbes article by Paul Gregory excerpted below, two useful figures based on Conference Board estimates look at GDP trends as well as trends in TPF, Total Productivity Factor.

The media have largely ignored the alternative estimates of Chinese growth of the Conference Board. These calculations (discussed below) claim that China’s growth has been overstated by some thirty percent over the reform era, that it has averaged around five percent for the past five years[Most] Alarming is the collapse of total factor productivity (TFP) since 2010, a pattern reminiscent of the USSR during its protracted period of stagnation preceding its collapse.

… the private Conference Board is a prominent source of data on the world economy, human capital, and technological progress. Among economists, the Conference Board is known for its productivity calculations and for continuing the path-breaking work of the late Angus Maddison’s Groningen Growth Center. International organizations report official country statistics, but the independent Conference Board prepares alternate estimates of suspect national statistics and even includes Taiwan (the world’s 21st largest economy) in its data set. Its stated goal is to provide “objective, world-renowned economic data and analyses that help business and policy leaders make sense of their operating environments.”

The Conference Board has reconstructed China’s GDP using methods reminiscent of recalculations of Soviet growth during the Cold War era. Among other adjustments, the Conference Board builds Chinese industrial production from the bottom-up from physical output series, lowers the official (and unprecedentedly-high) service productivity growth, and raises some of the inflation figures used for deflation of nominal GDP. The Conference Board sets out the details of its recalculations in a hundred page working paper. Thus, we know more about the Conference Board’s data series than about China’s official figures (China Statistical Yearbook).

As someone who earlier worked on the Soviet figures, the Conference Board recalculations seem reasonable, and should be considered as a welcome alternate perspective on China’s economic growth during its reform era.

The accompanying figure compares the Official-Chinese and revised Conference Board growth figures (five year averages from 1980-85 to 2010-15) with Taiwan and South Korea during their period of rapid growth from 1960-65 to 1990-1995. I use five-year averages to remove the effects of business cycles.

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What do these GDP figures tell us? First … Over the past five years, China’s growth has averaged below 5 percent according to the Conference Board versus the official figure of 7.5 percent. Only the most recent figures have attracted attention in the ongoing China soft landing debate. The value of the Conference Board series is, however, in its long-term nature. The business press, meanwhile, is interested in the last quarter.

Second …China’s thirty-year growth spurt replicates the Southeast Asian experience of earlier years. Let’s not forget Japan – the original East Asian miracle — which grew at an average rate of ten percent between 1950 and 1970. Exceptionally high growth rates appear to be a trademark of Southeast Asian countries that abandon state planning, have high domestic savings, and open up to the world economy.

The Conference Board’s … unique total factor productivity (TFP) series measure the extent to which economies grow “intensively” through technological advances rather than “extensively” by expanding human and physical capital. A concept largely familiar to professional economists, TFP is the “residual” growth not explained by the growth of labor and capital inputs. If, for example, GDP grows 3 percent and capital and labor grow by a combined 2 percent, TFP grows 1 percent and accounts for one-third of GDP growth. As the example shows, TFP is calculated from two figures: GDP growth and combined labor and capital growth, both of which are reported in the Conference Board 2014 data base updated to 2015.
__ Paul Gregory in Forbes

China’s Total Factor Productivity Trend shows Ominous Similarities to the Late USSR

Total Factor Productivity (TFP) is a better measure of a country’s long-term economic dynamism than is the more amorphous measure known as GDP. Like many economic indexes, the GDP often obscures more than it reveals. The TFP provides a more incisive and dynamic view of a nation’s economy — especially when measured over time.

The accompanying chart shows China’s TFP growth throughout the reform era. The official GDP figures yield productivity growth five times higher than the Conference Board series over the entire period. Both series show falling TFP after 2001. By 2012-2015, both sets yield either near zero or negative TFP growth. So in the better 2012-2015 case, GDP and capital and labor inputs expanded at about the same rate with no productivity advances. In the worst case, capital and labor inputs expanded faster than output for negative productivity growth! The Conference Board data base suggests that cases of negative TFP growth are rare except in times of world recessions such as 1998 and 2008.

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In the USSR case, declining rates of growth of GDP and TFP became irreversible after 1970. The ill-fated Gorbachev economic reforms made matters only worse. In the China case, the decline in TFP became pronounced in the early two thousands. With demographic factors allowing for little or no labor force growth, China’s GDP growth has been driven by unprecedented rates of investment. The declining TFP rates are therefore due to falling returns on capital, which Conference Board specialists blame on China’s “socialist-market economy,” which distorts economic incentives, deprives private enterprises of capital, and allocates state investment in favor of state enterprises. Whereas in the 1980s, China’s rates of return on capital were about average for BRICS countries (Brazil, Russia, India, China, and South Africa), current returns have fallen to about half. Interest rates on bank loans to large state owned enterprises remain around 6 percent, while private businesses pay 25 percent. Preferential terms for real estate developments have left Chinese cities with empty high rises with no buyers and opera houses with no opera.

China’s economic fate is in the hands of its leaders. Unlike Gorbachev thirty-five years earlier strapped with a planned economy and no blueprint for transition, China’s economy operates in the world economy, has access to technology, and receives foreign direct investment. Reform of capital markets, the banking sector, and municipal government administration would go a long way in reversing the collapse of output and TFP growth as would secure property rights.

Such reforms, however, seem unlikely. Premier Xi has declared the state sector the “backbone” of the economy. Party cadres have been instructed to take the teachings of Karl Marx seriously. Private businesses do not hold out hope for equal and fair treatment under Xi’s socialism with a Chinese face. Successful business owners will continue to plan their emigration to Canada or Australia before the long arm of the state and party catches up with them. China’s puzzle has been it rapid growth despite its miserable (144th) economic freedom index ranking. Perhaps China’s performance is starting to reflect the low quality of its institutions.

__ Paul Gregory in Forbes

Under Xi, the future prospects for China appear shaky, similar to the prospects of Russia under Putin. Neither country is willing to provide reliable statistics to global analysts. Both nations are arming themselves for regional wars on multiple fronts, as well as for military action in outer space, nuclear attacks over longer distances, and increasingly threatening cyber attacks – thefts – espionage – blackmail – and sabotage.

Rather than picking sides and rooting for a team — as in football — smarter people would set their own houses in order, and make provisions for a long cold winter.

More:

Private Chinese companies back away from investing in China

China’s shiny new military equipment is second-rate and likely to fail in wartime

despite the PLA’s growing budget, its equipment is marred by industrial deficiency and corruption, especially in high-tech fields such as avionics, where’s China’s best Soviet-designed jet fighters must struggle with locally produced, failure-prone engines or make do with aging Russian-supplied engines.

In 2013, a PLA commander lost over half of the vehicles in his tank battalion to mechanical failure as they attempted a 9-day march during a training exercise in Inner Mongolia.

As in Russia, corruption in China’s military is out of control. This leaves these militaries in the lurch when it comes to real world preparedness.

Never forget

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2 Responses to China’s Economic Conundrum

  1. Abelard Lindsey says:

    Despite Xi, China’s economy is much more free market oriented and diversified than the USSR ever was. If GDP and TFP in the USSR turned irreversibly down starting in 1970 with final collapse in 1991, it would be reasonable to assume that China, even with its demographic issue (remembering that socialism always reduces birthrates), has another 15-20 years left in it until it “collapses” and enters into another “warlord” period. I would place this around 2027-2035.

    If we take Zeihan’s predictions about China, Russia, and the EU and combine them with “Spengler’s” predictions about the demographic decline and 30 year existential war in the Muslim middle east, I come up with the following timetable.

    2020-2025: Both Iran and Saudi Arabia petro-states run out of money (this is going to be ugly – especially in Saudi Arabia)
    2020-2025: Collapse or devolution of Russia, breakup of and return of nationalism to the EU
    2030-2035: Collapse of China and return to another “warlord” period
    2030-2040: Escalation of culmination of Muslim Middle-east 30 year war
    2020-2040(?): India and Pakistan have a go at it with nuclear weapons (??)

    You know. Trump’s isolationist stance where we stay out of the eastern hemisphere for the next 25 years, combined with the fracking and small scale nuclear energy revolutions (and 3-D printing and automation revolutions) here at home, is very appealing to me.

    • alfin2101 says:

      Right. The article excerpted above makes a similar point. Even now, China could theoretically reform its system and bloom like a rose for many decades to come. That does not seem to be Xi’s plan. (Even Russia can still turn away from the abyss, but it would mean the death of Putin and Putinism.)

      Predicting anything is hard, especially the future. But the consequences of Putin’s decision to by violence and bluster reinvent the great Russian empire appears to be both the impetus for China’s premature desperate aggressiveness and a smokescreen behind which China hopes to move in force.

      Your timeline is necessarily flexible. But as you say, Russia is likely to collapse well before China, which would likely trigger most of your other events — and more.

      It is easy to see how the coming collapse of the Russian empire feeds into the global muslim reign of terror and the temporary ascendancy of China in Asia. The muslims believe they are bringing down Russia, but succeed only in bringing anarchy to much of Asia. Russia spins apart in violent centrifugal fragmentation as the many diverse client states within the empire finally assert themselves.

      China sends troops into Central Asia to attempt to stem the muslim violence, and somehow they take a wrong turn at Tashkent with the strange result of Beijing controlling everything in Russia east of the Urals.

      The India – China – Pakistan war would likely take place at a time near that tumult, with the invasion of Taiwan and China’s wars against Vietnam, Philippines, and Indonesia. North Korea as China’s cat’s paw attacks the South and Japan, perhaps with nukes. Turkey, Iran, Israel, and the Gulf Kingdoms are likely to go up at the same time.

      Ethnic wars flare across the third world and developed world alike, Europe’s cities and many cities of the Anglosphere go up in flames from open ethnic conflict. Only the jurisdictions and populations that have made advanced preparations for such violence come out the other side relatively cleanly. But the wildcards of EMP and cyber grid collapses will slow recovery. Any nation or jurisdiction too deeply invested in unreliable green energy schemes will probably be sent back to the stone age.

      Trump certainly seems a better choice than Clinton, although I do not see him as a great strategist by any means. If he and Zeihan can get together and plan a US neo-isolationist pullback from Africa and most of Asia, it may buy the US and North America time to build defences against much of the anarchic overflow and blowback from the explosion of the old world.

      AS always, parallel infrastructure and networked islands of competence will be crucial to recovery.

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