China’s growth: Pettis vs Ross
The China debate continues.
Moving to the pages of the FT.
While Chinese consumption was growing at an impressive 9 per cent a year over the past few years, Chinese gross domestic product growth substantially outpaced it, clocking in at 10 per cent to 13 per cent annually. China was able to do this in large part because as it poured resources and cheap financing into manufacturing, and in so doing produced many more goods than Chinese households and businesses were able to consume, the balance was exported abroad, where much of it was absorbed by US consumers.
But everything has changed. Willingly or unwillingly, US debt levels will decline over the next several years. As a result American consumption will grow substantially slower than the US economy, and so the trade deficit will decline. For the rest of the world, even ignoring the possibility of a decline in global investment, a contraction in the US trade deficit will bring with it a period in which economic growth will be less than consumption growth.
This matters, especially for China. If the Chinese economy was the biggest beneficiary of excess US consumption growth, it is likely also to be the biggest victim of a rising US savings rate. For now, China has been able to avoid the brunt of this reversal. Although Chinese exports have dropped, imports have declined even faster, so that China’s GDP continues to grow faster than its consumption, and China’s savings level, which is the inverse of consumption, continues to rise. But this has come at the expense of an unsustainable squeeze on China’s export competitors.
Eventually, and maybe this is already happening, the decline in the US trade deficit must result in a decline in China’s ability to export the difference between its growth in production and consumption. When this happens, China’s economy will grow more slowly than Chinese consumption, just as the opposite is happening in the US.
For now an extraordinary but inefficient expansion in new bank lending has powered the Chinese economy into growth rates that many thought unlikely even six months ago. But rapidly rising bank lending, especially if misallocated to nearly the same extent as in previous loan surges, cannot be a long-term solution for slowing Chinese growth.
Over the next five years or more Chinese economic growth is going to be constrained by growth in Chinese consumption. The massive but unsustainable investment in infrastructure and new production facilities that characterises the Chinese fiscal stimulus package will not be able to change this fact. From its dizzying heights during the past two decades, the world needs to prepare itself for a decade during which, if all goes well, China grows at a still respectable but much lower rate of 5-7 per cent. If the current fiscal stimulus package retards China’s adjustment process, as many analysts argue that it does, growth rates may be much lower.
Sir, Michael Pettis (“Get ready for lower Chinese growth”, July 31) unfortunately arrives at a wrong prognosis on China, predicting a slowdown of its growth to at best 5 to 7 per cent a year and quite possibly lower, because his article is wrong factually and contains errors in economics.
Prof Pettis writes that “although Chinese exports have dropped, imports have declined even faster”. This is the reverse of the actual trend. China’s imports have fallen less rapidly than its exports. Since the peak month of August 2008 China’s exports have fallen by 28 per cent but its imports have declined by only 18 per cent. China’s trade surplus reached its peak in January 2009, with a monthly surplus of $42.1bn, and since then its surplus has fallen steadily and rapidly – the surplus for June was $8.25bn.
This decline is despite trade price shifts which have tended to exaggerate China’s surplus. Research published by Goldman Sachs estimates that in real terms, if an adjustment is made for changes in export and import prices, China’s surplus has shrunk to one-third of its level 12 months ago.
Prof Pettis writes that “the decline in the US trade deficit must result in a decline in China’s ability to export the difference between its growth in production and consumption. When this happens, China’s economy will grow more slowly than Chinese consumption … rather than act as the lower constraint for GDP growth, as it has for the past two decades, growth in Chinese consumption will become the upper constraint.”
This is erroneous economics, as it confuses China’s domestic demand with its domestic consumption. Investment is equally a source of domestic demand and therefore increased growth of both investment and consumption is capable of allowing China’s economy to grow more rapidly than its rate of growth of consumption – as indeed it is doing at present.
Therefore there is no reason to accept Prof Pettis’s conclusions of a sustained growth slowdown for China. A high level of investment by China permits it to maintain rapid growth of the type seen in the last 30 years.
This debate is crucial. China is being touted by many as the engine of the world’s economy. If Pettis is correct, then we may have a problem. Ross is challenging him on both factual and theoretical grounds.
The debate is clouded by another story in today’s FT questioning the accuracy of Chinese economic figures.
China’s gross domestic product figures are among the world’s most closely watched since they can move markets or boost hopes of an imminent recovery.
But the latest set of first-half numbers provided by provincial-level authorities are far higher than the central government’s national figure, raising fresh questions about the accuracy of statistics in the world’s most populous nation.
GDP totalled Rmb15,376bn ($2,251bn) in the first half, according to data released individually by China’s 31 provinces and municipalities, 10 per cent higher than the official first-half GDP figure of Rmb13,986bn published by the National Bureau of Statistics.
All but seven of the regions reported GDP growth rates above the bureau’s first-half figure of 7.1 per cent. At the start of the year, Beijing set 8 per cent as China’s growth target for the year.
With the rest of the world looking to China as a beacon of expansion, the discrepancy is a reminder that statistics there are often unreliable and manipulated regularly by officials for personal and political purposes.
I’m not well placed to judge the accuracy of this figures, so I asked John Ross for his opinion:
There are considerable difficulties in producing statistics for an economy as huge, decentralised and rapidly growing as China when it is still a developing country – compare India for example where the same problems exist.
But is should be noted that the main statistical changes to China’s GDP growth have been upwards. For example at the end of 2005 China had to carry out a major retrospective revision showing that real growth in 2004 was 10.1% instead of 9.5% and annual growth from 1979 to 2004 averaged 9.6% or 0.2% higher than originally estimated. Additionally, China also announced the 2004 census results, which resulted in an upward change to the GDP estimate by 16.8%.
The key problem lies in under reporting in the very decentralised service sector – 92.6% of GDP revision came from tertiary industry. A good survey of these issues can be found at http://www.hktdc.com/info/mi/a/ef/en/1X007RVW/1/Economic-Forum/China-S-GDP-Revision-And-Its-Implications-To-Hong-Kong.htm
Given this problem in the statistics, it is entirely credible to have higher local growth figures being reported in China than national – because the regional figures are more in touch with the growth of the service sector. Chinese national statistical services are improving fairly continuously and if this is the explanation they will catch up. Of course not every single statistical revision has been upwards, so this precise one has to be looked at, nevertheless the general result of statistical revisions has clearly been to raise China’s GDP growth upwards.
The Heritage Foundation stuff is not serious because they keeping going on about discrepancies in China’s statistics to try to say that its growth is exaggerated – and don’t point out that when the statistical inconsistencies are removed the result has actually been to revise growth upwards!
I am going to deal with some of these issues on my blog in the context of the discussion on China’s stimulus package
John makes an important point. The first draft of GDP figures for any country are never that accurate, large revisions as data becomes available are the norm for any country. It may well be that the regional statistics are more accurate.