NEW YORK – As the global economy sputters, allegations that China’s economic data are unreliable have called into question its economic rise. But, if China’s official growth estimates are untrustworthy, why do world stock markets continue to respond to them?
Citing unnamed “corporate executives in China and Western economists,” The New York Times alleged in June that “there is evidence that local and provincial officials are falsifying economic statistics to disguise the true depth of [China’s] troubles,” thereby inflating a variety of economic indicators by 1-2 percentage points. Similarly, in August 2009, the Financial Times reported that the tally of GDP estimates provided by China’s 31 provincial and municipal governments for the first half of that year was roughly 10% higher than the figure released by the National Bureau of Statistics.
Nevertheless, when the NBS reported in July that annual GDP growth in the second quarter was 7.6%, financial markets staged a relief rally. Indeed, even though the growth rate was in line with estimates of economists polled by Reuters (7.6%) and Bloomberg (7.7%), the S&P 500 gained more than 2% in response to the official data. This reaction contradicts prevailing economic theory, which predicts that financial markets will respond only tepidly to announcements of “unreliable” official data.
To determine whether this event was indicative of a deeper pattern, Philip Hans Franses and I have studied how stock markets worldwide responded to preliminary estimates of quarterly GDP data from China (released first), the United States (released two weeks later), and Germany (released two weeks after that) in 2006-2009. We found that preliminary estimates from Germany and China significantly affected world stock markets on 10.4% and 12.5% of the release dates, respectively, while US estimates did so on 19.8% of the release dates.
While preliminary estimates are often revised – for example, US first-quarter economic growth in 2012 was initially put at 2.2%, but dropped to 1.9% in subsequent estimates – US and German data are widely considered trustworthy. Yet stock markets respond more to official US data than to German or Chinese estimates, suggesting that the economy’s size, rather than the data’s perceived reliability, is the determining factor.
Regardless, official Chinese economic data should not be discounted. Skeptics often cite the discrepancy between reported GDP growth and energy demand, specifically the contraction in electricity consumption. But, as Rachel Ziemba of Roubini Global Economics points out, these discrepancies fall well within the margin of error. Using historical data on electricity use, Ziemba shows that reported growth rates for 2009 are plausible, despite falling electricity production.
In fact, less energy-intensive Chinese growth should be a welcome development. In 2011, per capita carbon emissions in China were similar to emissions in the European Union, even though per capita income in China, measured in purchasing-power-parity (PPP) terms, was roughly one-fourth of that in the EU.
China skeptics also cite Vice Premier Li Keqiang’s notorious 2007 proclamation that China’s GDP figures are “man-made” and “for reference only.” At the time, China was experiencing its fifth year of double-digit economic growth, which surpassed 14% that year. Li’s remarks could have been intended simply to quell Western fears over China’s robust rise.
In fact, although China boasts the world’s second-largest economy, it ranks 121st globally in terms of GDP per capita, behind Ecuador and other developing countries. Given China’s stage of development, the NBS is doing a decent job, even if it is not providing perfectly accurate economic-growth data.
In any case, China’s rise is undeniable: it overtook Germany as the world’s largest exporter in 2010, and leapfrogged Japan in the Fortune 500 list of the world’s biggest companies by revenue this year. Furthermore, the world’s most populous country is set to surpass the US as the world’s largest economy, in PPP terms, in 2017. Even if official data overestimate China’s GDP by 5-10%, China will still overtake the US in 2018.
Skepticism about official Chinese data may help the West to assuage its unease about China’s rise, but it eventually will have to come to grips with economic reality. China’s official numbers may not be perfect, but they don’t lie.