The Conference Board's New China GDP Figures Suggest 'Hard Landing' Happened Already

An alternate estimate of economic growth.

China GDP: Expecting the Unexpected

You'd be forgiven for missing this footnote from the Conference Board's latest economic outlook:

"This year’s Global Economic Outlook uses an alternate series of [gross domestic product] estimates for China, which adjusts for overstated official Chinese data. Based on [Harry] Wu (2014), growth rates of Chinese industrial GDP are adjusted for misreporting bias and non-material services GDP are adjusted for biases in price deflators. This adjustment has important implications for our assessment of the growth rate of the global economy in general and that of the emerging markets in particular–both reflecting a downward adjustment in their recent growth rates. For a detailed discussion on this adjustment, see Wu (2014) and for frequently asked questions on the China adjustment see China GDP FAQ."

While many have questioned the accuracy of China's headline economic figures, it's still rare to see a semi-official organization use something other than authorized statistics. The Conference Board's economic data is widely cited and well-respected.

Indeed, the change was enough to generate a note from Macquarie Capital Ltd. analysts led by Viktor Shvets, who observed that: "We are unaware of any other reputable agency adopting anything other than official numbers as a base case, although clearly there has always been a lot of scenario analysis."

The difference between the official figures and the Wu estimate employed by the Conference Board is stark, as shown in the Macquarie chart below. While China's authorities have put forth average GDP growth of around 7.7 percent for the past five years, the Wu estimate is much lower, at around 4 percent.

Source: Macquarie

The Wu model is also far more volatile; it sometimes reports GDP growth faster than the official number, lending credence to the idea that Chinese authorities have been smoothing their figures in recent years. Indeed, others have observed that China may be leveling its data as it continues to move from the Soviet-style of economic reporting, in which various sectors self-report output, to the wider-used, independent system of national accounts (SNA).

The good news is that the cratering of the Wu estimate indicates that China's economy has already slowed down significantly and may already have reached its fabled "hard landing." This notion is supported by the Conference Board, which noted that its new estimates "suggest that the economy has already experienced a significant slowdown over the past four years, beginning in 2011." The bad news is that it also lends fresh urgency to the need for reform, as it implies a much lower level of productivity growth.

Here's Macquarie again:

Theoretically, the two series should converge at some point. However, from an investor perspective, a far more important question is whether China’s hard landing has already occurred and what are implications for productivity growth, overcapacity absorption and degree of likely financial stress? In our view, Wu-Maddison numbers explain the current state of commodity markets and fit into the global deflationary narrative much better than official numbers. In our view, the key difference between official and alternative estimates is the degree to which productivity and efficiency of asset utilization has already declined. If Wu estimates are right, the room for stimulus and investment is more limited and the need to drive productivity (structural reforms) much more urgent. Although by the time China retroactively adjusts its GDP, it would be treated as history, in the absence of stronger productivity rebound, China would be in danger of getting stuck in the ‘middle-income trap’ and would be unable to inject incremental demand into the global economy. Stay safe.

The Conference Board's FAQ on the topic is well worth a read.

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