Improving the Abacus
September 11, 2015
The Need for Better DataSince June 2015 waves of investor panic have deflated China’s equity market bubble, revealing the limits of Beijing’s ability to impose politically correct values on stocks. Despite gathering uncertainty, in August the People’s Bank of China took steps toward exchange rate regime liberalization, and the resulting volatility in capital flows exposed deteriorating confidence – Chinese and global – in the macroeconomic fundamentals underpinning the country’s growth outlook. These corrections in estimations of both China’s policy management and its fundamental growth potential have immediate spillover effects on worldwide markets and expectations. Government leaders and business decision-makers beyond China must now make judgments about the repercussions. To do so, they need to make sense of how much China’s present market adjustments – whether inadvertent or by design – will reduce near-term gross domestic product (GDP) growth, which requires addressing a larger question: how believable is the underlying base of economic activity? Never mind whether China is growing, is it really the $10 trillion dollar share of global economic output it claims to be? Recent work we have completed, including the new CSIS study, shed light on these questions. The size of China’s economy is fundamental to thinking about its growth prospects, but given the technical difficulties of examining it and the obscurity of China’s data system, it is less frequently studied than growth dynamics. In January 2015 Beijing declared the economy had reached nearly 64 trillion renminbi (RMB) in 2014, becoming the only other nation aside from the United States to join the 14-digit club – having a GDP over $10 trillion. Despite a year of painful restructuring, China managed to add $870 billion to its annual output from the previous year’s level, an increase of more than half of Australia's entire GDP. While subsequent discussion turned to whether and how China could continue to deliver such growth, an important assumption was largely left untouched: the foundations upon which Chinese and U.S. GDP are constructed are not quite comparable.
Daniel H. Rosen is is the founding partner of Rhodium Group (RHG) and leads the firm’s work on China. He is also a senior associate in CSIS's Simon Chair in Political Economy.
Beibei Bao is a research analyst at RHG, where she monitors and analyzes business, regulatory, and political developments in China.