How Badly Flawed isChinese Economic Data?The Opening Bid is $1 Trillion
By:Christopher BaldingAssociate ProfessorHSBC Business SchoolPeking Universitycbalding@phbs.pku.edu.cn
Short Abstract:
Baseline Chinese economic data is unreliable. Conservatively, correcting for housing price inflation inthe Chinese CPI data adds approximately 1% to annual consumer price inflation in China, reducing realGDP by more than $1 trillion.
Long Abstract:
Baseline Chinese economic data is unreliable. Taking published National Bureau of Statistics China dataon the components of consumer price inflation, I attempt to reconcile the official data to third partydata. Three problems are apparent in official NBSC data on inflation. First, the base data on housingprice inflation is manipulated. According to the NBSC, urban private housing occupants enjoyed a totalprice increase of only 6% between 2000 and 2011. Second, while renters faced cumulative priceincreases in excess of 50% during the same period, the NBSC classifies most Chinese households hasprivate housing occupants making them subject to the significantly lower inflation rate. Third, despitebeginning in the year 2000 with nearly two-thirds of Chinese households in rural areas, the NSBC appliesa straight 80/20 urban/rural private housing weighting throughout our time sample. This further skewsthe accuracy of the final data. To correct for these manipulative practices, I use third party and relatedNBSC data to better estimate the change in consumer prices in China between 2000 and 2011. I findthat using conservative assumptions about price increases the annual CPI in China by approximately 1%.This reduces real Chinese GDP by 8-12% or more than $1 trillion in PPP terms.
Keyword:
China, inflation, real GDP, GDP deflator
JEL Codes: E31, E4, E5
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Key Facts
According to the National Bureau of Statistics China (NBSC), the price of private housing in Chinarose by a total of 8.14% between 2000 and 2011 and only 5.99% in urban areas, where Chinesewere moving to in large numbers.
According to the NBSC, the annual price of private housing in rural areas grew at 1.67%, morethan three times faster than prices in urban areas at 0.53%.
According to the NBSC, the price increase of renting outpaced the change in the price of privatehousing by nearly 50%, making it significantly more advantageous to purchase an apartmentbetween 2000 and 2011 in China.
According to the NBSC, only 12% of Chinese households are renters, skewing inflation data.
To calculate the total private housing price change, the NBSC utilizes a straight 80% weighting of the urban population and a 20% weighting of the rural population despite the fact that in 2000nearly two-thirds of Chinese households were rural and only rose to 51% urban in 2011.
According to the NBSC, rural home values rose by 249% between 2000 and 2011 for acompounded annual growth rate of 8.65%.
According to the third party data, from the first quarter of 2000 to the first quarter of 2010, thenominal value of apartments in urban areas in China rose nearly threefold.
When using third party data and reconciling NBSC data in place of official housing inflation data,annual Chinese CPI increases by approximately 1% annually.
Incorporating this change in CPI into real GDP calculations reduces total real GDP by a mid-rangeestimate of 8-12% or $1 trillion in PPP.
Other significant discrepancies exist that will likely increase the size of the needed restatementof total real GDP.
According to NBSC data, the food component of the CPI in China was responsible for 99% of inflation between 2003 and 2011. This implies that the NBSC is claiming that the
only
prices torise in China between 2003 and 2011 were food prices.
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Introduction
Since China opened up to the world in 1979, it has been an economic juggernaut, officiallyexpanding by a compounded growth rate of 10% between 1980 and 2012. This rate actually acceleratedafter 1999, averaging 10.2% from 2000 to 2012. China has pulled hundreds of millions of its citizens outof
extreme poverty becoming one of the world’s lar
gest economies.However, there is strong evidence indicating that the rate of real Chinese GDP growth andultimately total real GDP may be significantly over stated. This discrepancy stems primarily fromsignificant and systematic irregularities in the inflation data maintained by China and the pass throughimpact on a wide variety of other data such as real GDP and disposable income. If inflation data is notaccurate, or is willfully fraudulent as appears to be the case, it will impact many other areas of economicand financial data leading to large disparities over time.Though there are undoubtedly other irregularities within Chinese inflation data, the focus of thispaper is the discrepancy around price changes in the cost of housing. The cost of housing is normallyone of the biggest single line items in many national price baskets. Consequently, changes in itscomposition will have a disproportionate impact on the calculation of real GDP relative to other items.There is strong evidence that China has systematically manipulated its housing price data in order tolower official inflation which, using conservative estimates, has lowered annual inflation byapproximately 1%. Over this time frame, this would conservatively reduce real Chinese GDP byapproximately 10%.Furthermore, this irregularity in the calculation of inflation may help explain discrepancies inother macroeconomic variables such as growth in money supply, nominal, and real GDP growth in China.Taken over a longer time horizon, there are discrepancies in other aspects of Chinese data that may beexplained by the inflation data.This paper is broken into three sections. First, I begin with an examination of Chinese price datafocusing on the housing market. Second, I study broader macroeconomic variables including crosscountry data from other emerging markets and developed countries for comparison. Third, using thisdata and plausible assumptions, I produce an estimate of real Chinese GDP.
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