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Inside China’s Black Box of Statistics

By Rana Foroohar | Time Magazine | September 3, 2012 | 2 pages

America, Europe and China are the three legs of the stool that is the global economy. We’ve known for some time now that the first was weak, and the second broken. Now, new quarterly GDP numbers show that China is growing a mere 7.6%, its slowest pace since 1999, with the exception of a single quarter right after the financial crisis. Does that mean the third leg is about to fall off the stool? While financial headlines are already screaming just that, I’d argue that the slowdown we’re seeing isn’t a crash landing, but could instead be the beginning of a much hoped-for rebalancing of the Chinese economy.

It’s true that nearly every trackable economic metric in China is down — from exports to new loans, to foreign direct investment. But all these numbers, like GDP itself, are calculated off the back of official Chinese government data. It will come as no surprise that this data is fuzzy at best. For example, provincial officials have every incentive to overreport their own GDP figures, since that’s what their promotions are based on. Conversely, in a country where “tall poppies” historically get cut down, wealthy individuals have every incentive to underreport their own earnings. Official retail figures, which should be a good measure of individual consumption, are skewed since they also include massive government purchases. Nonperforming loans, which would tell us how the banking sector is doing, are consistently rolled over or ignored. The bottom line: not only is it tough to tell whether China is really growing at 7.6%, official figures give us little sense of where growth is really coming from.

All of this was front and center at a recent New America Foundation round table on what is really happening in the Chinese economy. There, an independent, New York City — based research group called CBB International gave a presentation on their new China Beige Book, a resource modeled on the U.S. Federal Reserve’s own Beige Book, which I suspect will become an important resource for China watchers. Rather than rely on official nationwide data, the group divides the country into eight regions and interviews 150-plus C-suite Chinese executives in each region around the country about the state of business.

The results are illuminating. Property prices are picking up, but not everywhere; factory regions like Guangdong are lagging behind, while much of Beijing, Shanghai and Chongqing, areas driven by the higher-end service sectors, are reigniting. Electricity consumption, a much fetishized Chinese statistic that is supposed to help provide a more accurate (read: nonofficial) measure of growth is indeed down. But that may merely reflect the fact that the manufacturing sector (a huge electricity user) is flat, while the retail sector, which is consumer driven and requires much less energy, is up. Far from being a bad sign, that would indicate that China is actually moving away from being the factory of the world and toward the more consumer-driven economy that everyone has been hoping for.

Indeed, 60% of residential real estate agents on the ground polled by CBB reported higher revenue from the first to second quarters of this year. Data from elsewhere shows that while new loans were weaker than expected in July, more of them were longer-term household mortgages rather than short-term industrial loans, which again points to higher consumer spending vs. short-term stimulus from the government. China’s “disappointing” export-growth figure of 1% isn’t all bad either. Since 2007, “China’s trade surplus has more than halved,” notes Jim O’Neill, chairman of Goldman Sachs Asset Management. “The world wanted China to export less back in 2007. If the price is growth somewhere closer to 7% than 10%, perhaps it’s not a bad price.”

Of course, a massive falloff in the export sector could result in serious job losses and possibly even social instability, not to mention slower world growth. It’s not to be dismissed as a serious economic risk factor. Yet, a slow but steady move from export-driven growth out of Guangdong to consumer-led growth beyond the coast is a shift that is, broadly, to be welcomed.

On that note, one of the most fascinating bits of intelligence from the CBB report is that following the toppling of infamous Chongqing party secretary Bo Xilai a few months ago, credit availability, foreign direct investment and the retail sector surged in that region. It’s possible that this was a plan orchestrated by the central government to bolster confidence in the scandal-ridden city. But it could also be China’s own animal spirits, no longer dampened by a corrupt regional leadership, surging forth. If that’s the case, the conversation about the Middle Kingdom this time next year might be less about a hard landing than a much awaited economic resurgence.

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