What makes you think Li knows the truth?
By Scott Sumner
There is a great deal of skepticism about Chinese economic data. I believe that some of the skepticism is justified, but much of it is greatly overdone. This FT article discusses the critique that I find most plausible:
However, doubts have long lingered about the veracity of Chinese economic data, with many analysts believing them to be understated during times of rapid growth and overstated during the current slowdown.
Even so, I don’t see any reason to believe the average numbers are wrong (which would become blindingly obvious over long periods of time) or that the cyclical bias is particularly large.
If the Chinese persistently overestimated growth, that sort of deception would be hard to disguise. After a while China would be obviously poorer than claimed. But there’s an even better argument. Countries that do cheat on the inflation numbers (such as Argentina and Venezuela), quickly become the laughingstock of the international community. The exchange rate falls sharply, clearly exposing a depreciating currency. In contrast, China’s trade weighted currency has been trending upward for years, and no, the recent tiny devaluation against the dollar didn’t change that fact, as it’s still up sharply against most other currencies. Countries that do have high inflation (India, Brazil, etc.) see their currencies fall over time. And the other piece of evidence is that we know Chinese nominal incomes have risen very sharply in recent decades. It’s pretty hard to hide the fact that 1.4 billion people are getting double-digit raises year after year, especially when foreign business is heavily involved in the Chinese labor market.
OK, but what about the cyclical argument? Maybe instead of growth slowing from 12% to 7%, it slows from 13% or 14% to 5% or 6%. Yes, that possible. But if it’s occurring, I don’t believe it’s any sort of conspiracy, just a flaw in the statistics office. I don’t even think the Chinese government itself knows whether the data is overstating growth. Some of my critics are Austrian economists. They should recall that Austrian economics emphasizes that central planners can’t know everything that goes on in large complex economies. It’s quite possible that they are as confused as we are.
Recently a number of commenters pointed to what they thought was a smoking gun that China was exaggerating GDP growth. Premier Li (number 2 in China, and responsible for economic policy) declared that even he didn’t believe the data:
Some have instead turned to alternative estimates, such as the “Li Keqiang index” — a composite of various indicators favoured by the Chinese prime minister, such as electricity production and railway freight volumes. Many of those gauges fell into outright contraction late last year.
I hope you see the problem here. If this is a conspiracy, it’s a very strange one. Li is citing the same data sources as many of the China skeptics cite. But that suggests he doesn’t know any more about China’s actual GDP than we do! He’s just another Jim Chanos, reading the tealeaves. So no, I’m not impressed by the Chinese Premier “admitting” the flawed data. Not if he’s just as in the dark as the western Chinese skeptics that I don’t trust.
Inevitably some will want to go down the rabbit hole, to even deeper conspiracy theories. Maybe Li is just pretending to look at railroad and electricity data, and he actually is privy to the cabal of Chinese statisticians who systematically distort the data. He cites the electricity data because he doesn’t want to admit the Chinese government lies. Fine, let’s go from “grassy knoll” to “Bush ordered 9/11” level conspiracy theories. But there’s still a problem here—what’s the motivation? The original argument was that the Chinese inflated the GDP data to make China look better. They didn’t want to admit to the public that their policies were failing. I get that. But then why in the world would the Chinese Premier adopt the debating points of some of China’s strongest critics? Why issue rosy data and then tell the public the truth is far worse?
In fact, I think the world is much messier than we assume. Conspiracies are really hard to pull off. If you bring in enough people to make it work, you can’t keep it secret. If you only involve a small number, you can’t make it work. In 1991 some Russian military officers tried a coup, but they didn’t have enough critical mass to pull it off, presumably because they wanted to keep the plot secret. Other generals refused to go along. Why should they? They weren’t invited, which tells you they wouldn’t be high up in the next government.
The other lesson here is that we should not assume government policymakers know more than we do. Do not defer to the expertise of the Fed. I’m willing to grant that the Fed has an impressive data operation, and might have slightly better real time estimates of GDP than I do. But they are let down by their model. The market takes everything into account when forecast the future path of interest rates (that’s rational expectations), whereas the Fed only takes into account their interest rate forecasting model. As a result the market currently forecasts a flatter path of interest rates than the Fed, and I suspect the market will turn out to be right.
PS. The FT article ends on a sensible note:
Figures around 5 per cent [RGDP growth] contrast with the consensus estimate from investment bank economists, which is currently 6.9 per cent for 2015.
David Meier, economist at Julius Baer, has an official forecast for this year of 6.7 per cent, but notes “suspicion that the figures could be 1-2 per cent overdone”.
“At the end of the day, we have to comment, analyse and publish forecasts based on the official [gross domestic product] data series,” he said.