Want to Understand How China is Doing? Don't Look at GDP

Why the classic benchmark statistic is unsuitable to describing the world's second-largest economy.
Carlos Barria/Reuters

For over a quarter century, the one figure that dominated discussion of China's economy was this: eight percent. Beginning in 1982, when leader Deng Xiaoping established the percentage as necessary to quadruple the size of the country's GDP by 2000, China has seldom failed to achieve it—even in 2009, when the world was enduring the worst downturn since the Great Depression. The eight-percent figure became so entrenched that it acquired an almost Talmudic significance, causing speculation that if the economy didn't grow by that amount, social instability would surely follow. (The fact that the number eight is considered lucky in Chinese culture only added to the mystique.)

These days are now over. China's GDP has failed to reach the benchmark for six successive quarters, checking in at 7.5 percent for the second quarter of 2013. Though this growth is still robust by global standards, the sub-eight percent figure has raised concerns that a Chinese  “slowdown” is now permanent—and will have serious consequences for the rest of the world.

The death of the eight-percent benchmark does however give us an opportunity to re-examine GDP and the assumption that, if China achieved a certain percentage, the Communist Party was succeeding. Whether or not China achieves seven, six, or five percent growth in the coming years—as economists like Michael Pettis have asked—do measurements of the country's GDP even matter? Here are a few of the issues involved in assessing the health of China's economy.

China's official GDP numbers may not be very accurate

Interpreting what China's GDP numbers mean is difficult enough in the best of times—but what if the numbers themselves aren't reliable? Although the veracity of Chinese economic data is a subject of debate, critics of the data have two basic concerns:

The first is transparency—the Chinese Communist Party has historically been cagey with its methodology, and the speed with which it releases quarterly GDP percentages puts the numbers' accuracy into question.  According to Leland Miller, CEO of China Beige Book, a company which compiles reports on China's economy based on surveys of businesses within the country, quarterly GDP figures are released just 12 days after the quarter ends—and leaked after nine. By contrast, the United States requires four weeks to release data, and Hong Kong—a comparatively tiny economy—needs six. The fact that an economy the size of China's can compile this information so quickly has led observers to question the accuracy of the data.

Secondly, national-level data in China doesn't always match information provided by provincial and municipal-level governments, occasionally producing a difference of 10 percent. One reason is politics. During China's reform and opening era, lower-level officials have been judged by their ability to produce economic growth, providing an incentive for leaders to overreport GDP. An additional problem, according to Beibei Bao, who analyzes China's economy for the Rhodium Group, a New York-based consultancy, provincial-level economic statistical bureaus were often understaffed.

Not everyone, however, agrees that these statistics are so inaccurate. In a newsletter from earlier this year, the San Francisco Fed argued that China's GDP data is basically reliable, a claim backed up by Nicholas Lardy, a China specialist at the Peterson Institute of International Economics. Lardy told me that in recent years, Beijing has taken steps to centralize data collection, relying less on under-staffed (and possibly corruptible) local and provincial bureaus. As a result, Chinese numbers have become increasingly reliable.

Matt Schiavenza is a contributing writer for The Atlantic. He is a former global-affairs writer for the International Business Times and Atlantic senior associate editor.

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