For anyone committed to understanding China’s political economy, government data are notoriously inaccurate. It is safe to report that the vast majority of China’s official economic indices misrepresent China. One isn’t capable of determining whether current trends indicate a cyclical or a structural problem. Glancing at reported indices does not capture the true nature of China’s political economy in transition. So what would?
There are three independent variables that remain free from the wiles of Beijing’s governing mandarins. One needs to underemphasize gross domestic product and per capita GDP and turn to personal income and debt. Moving forward, leading Chinese technocrats must upgrade the major economic indices shaped around productivity and human capital.
The rebalancing away from manufacturing toward a consumption-based polity would indicate a need to frame economic indices away from an archaic export-based model. If China is indeed changing, it needs to revamp the entire reporting architecture. Current reportage cannot capture the true nature regarding the direction and nature of China’s political economy.
Throughout 2017, the implicit GDP deflator, meaning the difference between nominal and announced real growth, was twice as large as changes in China’s consumer price index (CPI). Variations in the GDP deflator don’t necessarily embody volatility but may suggest outright political manipulation.
We see identical results regarding the sporadic release of China’s unemployment rate. Even with annual revisions, it never tops 4.3%. Both alternative unemployment indices and other major prominent indicators are released sporadically, none of them revealing the true nature of China’s problems.
For example, GDP measures all domestic transactions, but fixed-asset has always been larger than reported GDP. The same exists for national economic reportage of retail sales plus net exports; both exceed GDP. Why is this the case with China?
The easiest explanation is that national economic surveys of investment and labor remain exceedingly expensive; more likely, the Communist Party of China doesn’t like any competing sources of authority, so it openly discourages official indices from provincial sources.
The rebalancing of China’s political economy toward a market-based regime has overt political tones that openly threaten Beijing’s ruling class. As it currently stands, if market signals continue to be ignored or deliberately obfuscated, China’s structural downturn will become entrenched, in effect condemning Chinese labor to the middle income trap. This cannot be reconciled to the mandate for social stability. The message for Beijing is simple, stark and direct: open the capital account or fail.
Measuring the effectiveness of monetary policy reveals a dangerous enclosure; as a countervailing benefit against crooked indices, China has no incentive to falsify money data, even though both businesses and labor officially underreport income, measuring the stock of reserves in circulation reveals that monetary policy isn’t effective any more. This means the Chinese central bank is more likely to exercise its authority in risk management than outright economic growth.
To change this variable, Chinese authorities need to re-examine the socio-political threats that animate the rebalancing of a new regime reflecting markets. Today’s ceiling on Chinese economic performance remains self-imposed.
Going forward, what should Beijing’s political class aim for? It should openly seek foreign-capital inflows to structure both new bond and capital markets, effectively underwriting sound money into new official indices. The willingness of foreigners to hold renminbi is a benchmark of worthiness, so China’s political class needs to pay attention to its foreign policy abroad.
Sustained large inflows are indicative of sound economic performance. Policies that ease the opening of China’s capital account remain political. The easing of China’s balance of payments, a new economic background of sound fundamentals, can only begin with a synoptic political approach, not piecemeal examination of domestic tax reform or appeasement to US President Donald Trump’s base about trade deficits.
If accurate indices embody predictive value, then China’s governing class needs to re-examine the political challenge of rebalancing; a challenge it cannot avoid.
Quality data and clear economic performance are best represented with indices that embody clarity. Absent new economic indices tethered to an open market-based account, China’s current turmoil will continue.