How high was China’s growth rate in the first half of 2015?

One of the reasons that people around the world is worrying about current Chinese economy is because its recent official growth rate is doubtful. According to official statistics, the GDP growth rate of the first half of 2015 was 7.0 per cent. This is exactly the same with the growth target set earlier this year, and it is not a low figure anyway. If this figure is true, then Chinese government officials will have nothing to worry about their economy.

But the reality is that China’s central bank has lowered its interest rates and reserve rates five times since November 2014, the State Development and Reform Commission launched several investment projects in July 2015, and some other measures to boost the economy were implemented by the Chinese government. It seems that the Chinese government is thinking that the economy is worse than the official figure suggests.

I myself started to doubt the correctness of China’s GDP growth statistics since the figure for the 1^st quarter of 2015, which was also 7.0 per cent, was announced. My doubt was even deepened when I saw the statistics of the 1^st half of 2015. I do not think that Chinese statistics as a whole is sheer nonsense. But I do think that the GDP growth rates for this year are embellished.

So the true figure was lower than 7 per cent, but how much was it? My estimate is 5.3 per cent. Before explaining the reasons why I reached this figure, let me explain the features of Chinese economic statistics. 

Chinese statistics bureau offers very detailed data on agriculture and industry production. In China, “industry” is constituted of mining, manufacturing, and utilities industry, like electricity, gas, and water supply. To run a planned economy the Chinese government needed to grasp agriculture and industrial production in detail. This tradition has been inherited to the current statistical system. In the case of automobile production, for example, the statistical authorities collect very detailed data on the production from all the automobile manufacturers in China, including those which are on the verge of bankruptcy, making only 8 units of vehicles a year! 

The weak point of Chinese statistics lies in the tertiary industry, like retailing and transportation. During the planned economy era, Chinese authorities did collect data on retailing and transportation, which were run by state-owned enterprises then. After reform, private enterprises became more and more dominant in these sectors, but the statistical system could not follow such changes in the structure. According to official figures, the tertiary industry only accounts for 46 per cent of GDP in 2013, which is very low compared to other countries. But we shall not interpret this figure simply as indicating the underdevelopment of China’s tertiary industry. It also indicates the underdevelopment of China’s statistical system in grasping the realities of tertiary industry. 

The income of people is also a weak point in Chinese statistics. Those who have lived in China for a long period may know that Chinese people, including not only corrupt officials but also ordinary people, have more or less grey income. People who do not report such income to the tax office may not report them to the statistical officials either. 

Reflecting such features of the statistical system, China’s GDP statistics are constructed mainly from the production side. In the cases of agriculture and industry, added value is estimated from production statistics. While in the case of tertiary industry, in which production statistics are hardly available, added value is estimated from the income side, like the wages of employees and firm profits. If the incomes are underreported, it will result in the underestimation of the added value of tertiary industry. 

The GDP growth rate of the 1^st half of 2015 is decomposed into the growth rates of agriculture (3.6 per cent), industry (6.0 per cent), finance (17.4 per cent), and so on. It is not surprising that finance sector grew at a very high speed this year, because there was a creation and a collapse of stock bubble this year. What is most questionable is the industrial growth rate. 

Along with the GDP statistics, the production volume of 27 items of industrial products were revealed. Only 4 items recorded a growth rate greater than 6 per cent, while 13 items recorded a negative growth. Since industrial production is the most accurate part in Chinese economic statistics, I am doubtful of the industrial growth rate. 

Of course, the industrial growth rate, which compares current added value with that of the previous period, need be the same with the growth rate in production volume. But, as the table below shows, the weighted average of the growth rates of the production volume of various products have been at quite similar levels with industrial growth rates, with the exception of the 1^st half of 2015. This is why I think the industrial growth rate of the 1^st half of 2015 is overblown. Using the relationship between the two figures, I estimate the real industrial growth rate of the 1^st half of 2015 as 1.3 per cent. Supposing that the statistics on all other sectors were correct, the GDP growth rate will be 5.3 per cent for the first half of 2015.