China's economic data are (still) not credible

Not Rebalancing Yet

The flaws in Chinese data have serious consequences. The imbalance between consumption and investment has become a critical force in the world economy, but data issues cloud the extent and trend.

Using national accounts measurements, consumption's share of GDP was below 48 percent in 2010. This is about 15 percentage points below the ideal level and continues a decline that began in 2002. Regarding investment, the Asian financial crisis of 1997–98 occurred in large part due to unproductive outlays. The year before it erupted, Indonesia's investment share of GDP was below 36 percent. In 2010, China's share of investment in GDP approached 49 percent, surpassing consumption and a historically unprecedented level.^[i]

Some claim that China is already rebalancing. They cite retail sales as growing faster than consumption as measured in national accounts. But retail sales are a poor economic indicator. This figure is incompatible with official GDP, so both cannot simultaneously be accurate.^[ii] And retail sales have been quickly rising precisely because they include elements that have nothing to do with consumption, such as building materials and government-to-government transactions.

Another tactic is to cite estimates that reveal official consumption as too low. Due to inadequate survey methods, however, official figures have underestimated the size of most of the Chinese economy. For the same reason, official numbers often overestimate annual growth, since the base is larger than acknowledged and some annual gains consist of "discovering" old activity. Isolating parts of the economy is a serious error. That consumption is larger than estimated does not establish its GDP share or growth trend.

Restructuring by Default?

Data and interpretation errors should not obscure the magnitude of the consumption-investment imbalance. It is true consumption has been growing steadily. The problem is that investment always grows faster, as it did in 2011, so consumption's GDP share still falls. Moreover, financing rapid investment requires consumption to be suppressed through lack of competition, low returns on savings, and so on. For true rebalancing, investment growth must decline noticeably, something Beijing has been utterly unwilling to accept.

In 2012, it is possible that the central government may be persuaded to stand aside and let investment moderate, for two reasons. First, the explosion in lending triggered in 2009 in response to the global shock restricts both the quantity of stimulus in 2012 and its potential impact.

Second, specific sectors reinforce the idea the government might restrain itself.For instance, real estate receives one-fourth of fixed investment. Real estate spending should stabilize, but explosive growth is unlikely. Dampening power consumption growth argues against heavy new spending on plant construction. Railways were to be a source of extremely high investment, but well-documented problems with rail expansion now makes that unlikely.

Beijingcan still find sectors through which to ensure another 25 percent rise in investment, but the task will be harder. How determined will the government be? The political transition in 2012 argues for high stimulus. There is a counter-argument, though: Overcapacity is daunting. For example, nearly one-third of aluminum capacity could be unused in 2012. Overcapacity in autos may reach a similar level a few years later.^[iii]

Hence, most traditional industries could be harmed more than helped by further investment in 2012. This may finally cause investment to slow such that consumption can catch up. The central government does not need to act; it only needs not to act.

Challenges for the U.S.