Lingering questions about China’s GDP accounting
As you know, we are big fans of China’s rapid economic growth over the last two decades. We also know that China has significant problems as well, from censorship to human rights abuses to environmental depredations and more. Many of these are well reported on. But with some rare exceptions, many of China’s questionable accounting practices have been passed over in silence by the press, and abetted by officialdom. Take this chart from the IMF, via the WSJ:
The chart purports to demonstrate that China now represents 15-16% of world GDP. That may be true, and then again, it may not be close to true.
First of all, the chart is not calculated on official exchange rates, but on something called purchasing power parity. We discussed that issue quite a while ago. PPP is okay for some measurements, but has significant deficiencies, chief among them the tendency to overvalue GDP of third world and agricultural economies. PPP makes China’s economy appear much larger than it is at official exchange rates, since hundreds of millions of Chinese peasants and farmers who make cash earnings of little more than $500 a year live better than than that income level suggests. (There has been a heated debate among academics about PPP versus exchange rate reporting, for those interested in the subject.)
Leaving PPP aside, what about China’s share of GDP at official exchange rates? It’s hard to say, because China’s GDP numbers have demonstrated an uncomfortable degree of flexibility. In 2004, China originally reported GDP of around $1.65 trillion. Then, some months later, China revised that number by an astounding $278 billion, and declared that its 2004 GDP had really been $1.93 trillion all along. Once a country decides its books have been off by $300 billion in one fell swoop, it’s hard to know what to make of any other numbers they produce. 2005 saw a further robust increase in GDP to $2.26 trillion, according to State Department figures.
2006 saw another spectacular increase, to just over 20 trillion yuan, or $2.6 trillion. Maybe the 20 trillion yuan is a genuine number, but, given the convenient and politically useful 2004 revision, it’s hard to shake the feeling that some bean counter in China’s GDP office was told to make the 20 trillion number happen or donate a kidney to science. So we are supposed to believe that China’s GDP, initially reported in 2004 as $1.65 trillion, grew almost $1 trillion in two years, or an amazing 58%, from the originally published figures. Maybe. Maybe not.
In any event, it is very difficult, using official exchange rates, to produce anything like the chart above. The IMF shows China at 16% of world GDP. Using China’s $2.6 trillion GDP as reported, and world GDP of $46.66 trillion (via CIA), China’s share of world GDP is about 5.6%. Using two years of ten percent growth beyond China’s originally published 2004 GDP, China’s share of world GDP is more like 4.3%.
Investor’s Business Daily says that China’s accounting is a shell game. If so, why are official bodies playing along? Is it the potential instability that could result from China’s bad debts, sometimes estimated at more than $1 trillion? Is it the potential instability that could result from China’s making abrupt reallocations of its $1 trillion in foreign exchange reserves? Is it that the West thinks that China’s potentially cooked books is a small price to pay for that Communist state’s transition to a capitalist economy?
Finally, even if it is in the interests of the governments of the West to look the other way, in the event that the charges of IBD and others are correct, why is not the press vigilant and curious in pursuing a story that would make the Enron scandal look like a ruckus over a lemonade stand?
March 18th, 2007 at 5:34 pm
It is getting to the point where a comparison with Soviet statistical fraud might be useful. The works of the late Naum Jasny were very good about this topic. Ignore “Soviet Economic Statistics” (Rand), which took the nonsense seriously. Good hunting!