Much of the Analysis of China’s 2014 GDP Data on Economic Slowdown But From a Very Big Base

MUCH of the analysis of China’s 2014 GDP data, which the government published today, has focused on the economy’s slowdown.

That is, on one level, understandable. Growth of 7.4% was China’s weakest in 24 years (see chart below). It was also the first time this century that China has missed its official growth target, falling just short of the official goal of 7.5%.

But on another level, the focus on the slowdown seems almost myopic. China joined an exclusive club last year: its economic output exceeded $10 trillion, making it only the second country to achieve that feat (America reached this level in 2000).

At market exchange rates, China’s economic output was $10.3 trillion last year, more than five-times bigger than a mere decade ago, when it was $1.9 trillion.

Moreover, the increase in China’s economic size means that slower growth now generates as much additional demand as its turbo-charged growth did just a short time ago. Last year’s growth, even with subdued inflation, yielded an extra 4.8 trillion yuan in GDP, almost exactly the same as in 2007, when growth ran to 14.2% and inflation was far higher.

And because the economy today includes more labour-intensive services than in the past, China is doing even better at creating new jobs: it added 13.2 million urban jobs last year, compared with 12 million in 2007.

This would all be beside the point if China’s growth was simply the prelude to a spectacular collapse. But looking beyond the headline GDP figure, China’s growth also appears to be slowly becoming better balanced.

The big concern since 2009 when China unleashed a mammoth stimulus programme has been the economy’s excessive reliance on investment and its sluggish consumption spending. Gross fixed capital formation accounted for 48.3% of China’s growth in 2011, well above the peaks of roughly 40% hit by South Korea and Taiwan when they industrialised last century.

We will have to wait for a breakdown of GDP by expenditure to get the 2014 figures for China, but the data from today’s release point in the right direction.

First, even with last year’s ‘mini-stimulus’ to prop up growth, investment is, little by little, playing a diminished role in China’s economy. Consumption drove 51.2% of growth last year, up 3 percentage points from a year earlier.

With the contribution from trade also positive for growth, China’s investment-to-GDP ratio is likely to have declined. This can also be seen from the rising share of services in GDP. Services, which are more closely correlated with consumption than with investment, grew to account for 48.2% of the economy last year, up 1.3 percentage points from 2013.

Second, healthy wage growth means that labour’s share of China’s economic output rose last year, another critical part of tilting the country towards greater consumption. After controlling for inflation, incomes increased 8% last year, three-fifths of a percentage point faster than the economy as a whole.

Importantly, this income growth probably also resulted in a mild improvement in income equality within China because it was rural citizens, poorer than their urban counterparts, who did particularly well. Rural incomes increased 9.2% last year on average, while urban incomes rose 6.8%. The gap between urban and rural incomes peaked at a ratio of 3.3-to-1 in 2009; it fell to about 2.9 last year.

Anytime there is good news to be gleaned from Chinese statistics, it is customary to ask whether the government’s numbers can be trusted. This is a fair question given evidence in the past that officials, especially those at the local level, have manipulated data to flatter their performance.

It is well known that even Li Keqiang, now China’s prime minister, cast doubt on the reliability of local numbers when he was the Communist Party chief of Liaoning province.

A divergence between resilient economic growth and the much slower increase in electricity output over the past year has fuelled suspicions that the government is again playing games, since electricity used to be a close proxy for the economy as a whole.

But that is an outdated way of looking at the Chinese economy: as the services sector grows more quickly and heavy industry weakens, slower electricity output is to be expected.

2013 survey of Chinese statistics by Carsten Holz of the Hong Kong University of Science and Technology found no proof of falsification. That said, he also noted that a lack of transparency made it impossible to double-check final data.

In this respect it is encouraging that China missed its 2014 growth target. The message from the top of the government is that growth is not as big a priority as in the past.

It is a message reinforced by the constant repetition of President Xi Jinping’s favourite slogan for describing the economy, the ‘new normal’. That phrase, intended to describe slower but higher-quality growth, was trotted out no fewer than eight times by the statistics bureau during today’s GDP news conference.

The Chinese government’s tolerance for the slowdown will be tested in coming months as property investment, the biggest single driver of the economy in recent years, is likely to weaken yet further. The International Monetary Fund has cut its forecast for China’s 2015 growth to 6.8%.

That would be its weakest performance in 25 years. But when headlines appear about the 25-year low, as they inevitably will, it is worth remembering that the Chinese economy is more than 25-times bigger than it was in 1990.

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