Adam Wolfe and Rachel Ziemba
With contributions from Italo Lombardi
The accuracy of Chinese economic statistics is always a topic of debate, and the global financial crisis added a lot of fuel to the fire. According to official statistics, China looks to be one of the first to emerge from the downturn, at least as far as reporting growth acceleration. GDP data to be released later this week are likely to show acceleration from the 6.1% y/y pace in Q1 2009. Yet this recovery seems questionable when China’s exports and major trading partners continue to suffer.
Some indicators seem to suggest that China’s growth at the end of last year may have been even weaker than Beijing claimed. (In China, 6% growth represents a hard landing compared to the 10% average of the previous five years.) For example, the International Energy Agency (IEA) questioned how China’s 6.1% y/y growth rate in Q1 2009 could match up with its 3.5% y/y drop in oil demand in the same quarter. The IEA admits that “pinpointing China’s oil demand with accuracy is an exercise fraught with difficulties,” but other, more easily verified indicators also seemed out of alignment in Q4 2008 and Q1 2009.
Most notable was electricity production, which grew on a very predictable path along with China’s GDP until the end of 2008, when it fell 6% y/y in Q4 compared to a reported real GDP growth of 6.8%. The divergence continued into Q1 2009, with electricity output falling 4.3% y/y alongside 6.1% real GDP growth. Heavy industry may have been harder hit by the economic downturn than less energy-intensive industries, but this divergence is striking nonetheless.
Many economists have long built proxy indexes to track the trends in the Chinese economy, which tend to include energy demand statistics. While most analysis tends to suggest that the overall trend of output is relatively consistent with released statistics, they tend to conclude that bumps in output sometimes are smoothed over.
Given past examples of local officials manipulating statistics to further their careers (e.g., the aggregation of regional figures exceeding the national GDP tally by 3.9% in 2004), it wouldn’t take a great leap of imagination to believe that a similar trend might be playing out during the greatest test to China’s economy since at least 1997. Perhaps this explains China’s new, tougher penalties for falsifying economic data.
As electricity production figures can be checked more easily by matching them to energy inputs, for example, they are assumed to be accurate. Also, local officials should have less motivation to alter these figures than GDP. Officials and analysts regularly cite job growth as critically important to the continued rule of the Communist Party of China (CPC)—growth in electricity production rarely creates jobs, but investment, industrial production and growth do.
However, a preliminary investigation based on a model described below suggests that the reported recent growth figures might not be so far off. Based on historical correlations of electricity production and real GDP growth, one would have expected somewhat lower than reported growth in Q4 2008 and Q1 2009. Still, the reported figures were within the margin of error, suggesting that the reported growth rates are in fact plausible alongside falling electricity production.
The first step to test whether or not the reported real GDP growth could be consistent with the contraction in electricity was to create a real GDP index. China only reports nominal GDP figures quarterly and real GDP growth rates for each quarter on a y/y basis. Electricity production is reported on a “real” scale (kilowatt hours), and it is important to compare this to a measure of China’s economy that controls for inflation. After all, China dipped into deflation during the same time period that we are exploring.
Once this index was created (using Q1 2004 as the base), it could be tested alongside electricity production. After controlling for autocorrelation in both data sets, the regression produced a very tight fit with a high explanatory value (adjusted R-squared of 0.9997). Electricity production was statistically significant at the p<.001 level, with a high, positive coefficient. This matched the expectation that higher electricity production levels would coincide with higher real GDP levels.
The resulting projections showed lower y/y growth rates than reported: 5.9% in Q4 and 5.3% in Q1 compared to the reported 6.8% in Q4 and 6.1% in Q1. But the reported growth rates were within the margin of error from the model (which went up to 6.9% in Q4 and 6.7% in Q1). Even though the standard error was very small for the index (about 20 billion RMB), it was enough to introduce a bit more than a 1% confidence interval on either side of the growth rates. Therefore it is entirely possible that the real GDP growth rates reported by the National Bureau of Statistics were accurate, despite the fall in energy production in the periods in question.
Still, since the electricity production figures already have been reported, a forecast for Q2 2009 is possible. Based on this model, we should expect 7.1% y/y growth, but the 95% confidence interval would allow for rates up to 8.6%. Considering the trend of the past two quarters, the reported figure may come in around the upper end of the 7% range. On the one hand, officials will want to show that their stimulus measures are exhibiting progress. On the other hand, too much success could lead to calls for tighter monetary and fiscal policies to contain future inflation. As highlighted in the forthcoming RGE outlook for China, the effects of the banking and investment surge could pose risks to future growth.
While this model was not able to prove the link between politics and China’s GDP, it’s also not enough to show it doesn’t exist. Next year, however, we should get some help in discerning the trajectory of Chinese growth. The National Bureau of Statistics will begin reporting real GDP q/q growth rates alongside the y/y figures in 2010. This move toward greater transparency will help shed light on future discrepancies.