Slowly, even those most bearish about the Chinese economy are reverting to caution or scepticism. There has been economic growth, of course, but there has also been smoke and mirrors.
There are two main reasons why the size and strength of the economy has been overestimated. First, the official statistics have been wrong.
From about 2010, even official growth rates have been edging downwards, from about 10 to about 7 percent. But independent analysts, such as the Conference Board, Capital Economics and Lombard Street, have found that either growth has long been officially overstated and/or that the decline has been steeper than officially stated, down now to about 4 percent or less in annual growth. In a survey of American economists by the Wall Street Journal (11th of September), the overwhelming majority said they do not believe the official estimates accurately reflect the state of the economy.
Second, and more permanently, there are weaknesses in the economy itself that have not been easily visible and not recorded statistically. The government has stimulated economic activity by pouring in cheap credit and directing its enterprises to turn that credit into a stream of investments, some sound and some bad. The GDP statistics record all of the economic activity but do not adjust realistically for the burden of bad debt and investment.
Estimates by researchers at the Chinese National Development and Reform Commission, an official agency, suggest that near to half of the total investment in the Chinese economy in the years 2009 to 2013 (the period of post-2008-recession stimulus) were ‘ineffective.’ Their research also found that investment efficiency has fallen sharply in recent years, which means that the economy gets steadily less additional economic growth for every unit of additional investment, to the effect that annual growth in the relevant period corrected for ineffective investment would be 2 to 3 percentage points lower than in the official statistics.
If you dig holes in the ground and fill them up again, that’s economic activity without anything being produced. If you borrow money to build highways that are never used or apartments that are never lived in, that’s investment but not investment that creates real capital that is converted again into real consumption or further production.
It works like this: If an unnecessary airport it built, that’s economic activity. It creates demand for steel, concrete, glass and the like and jobs are created. This shows up as GDP in the statistics. But once the airport is there with little traffic, it becomes a drain on the economy. It has to be kept up and maintained and kept in service for little or no business, or at worst abandoned.
During the growth period, China has had a steady flow of such ineffective investments. That has notched up the GDP numbers to artificial levels. The numbers have not always been ‘incorrect’ but nor have they reflected real economic strength.
Part of the reason why measured economic growth has been falling recently, is that the burden of debt and ineffective investment has been accumulating and caught up with the real economy, and come to weight more heavily in the balance. The new figures are lower partly because real growth is down but partly also because the previous exaggerated figures are no longer statistically maintained.
Xi Jinping and his team announced early on in their tenure that they intended to restructure the economy to make it less investment-heavy and more consumption driven. However, the consensus among watchers of Chinese economic policy is that this reform programme is, at best, being taken forward hesitantly and at a low pace. In the best years, Chinese economic growth looked too good to be true. Well, we are now coming around to accepting that it wasn’t quite true. The new leadership early on seemed to be true modernisers, but that also looks too good to be true and there has been little of bold reform to be seen.
The Chinese economy is best understood as big and lumbering, rather than strong and nimble. It continues to churn on in its lumbering way as an economy that is impressive on the visible surface but with huge if less visible structural weaknesses under the surface. Of economic activity there is much, of economic strength less.