GDP growth doesn’t mean what you think it means

CHINA FINANCIAL - Report 30 Oct 2017 by Michael Pettis

Special points to highlight in this issue:
• Over the next few years either reported GDP growth in China will drop very sharply, probably to well below 2-3 percent, or it must surge to levels that will rival or surpass reported GDP growth in the 1990s and 2000s, probably to well above 10 percent. No other possibility is consistent with the data.
• We usually treat a country’s reported GDP as an economic-system output, variations in which can be analyzed to get an understanding of the performance of the underlying economy and its future prospects.
• In China, however, GDP growth is not an output. It is an input, set by the government in the form of a GDP growth target. Government entities are expected to generate enough economic activity, whether productive or not, to achieve the growth target. The financial system is expected to allow debt to grow by whatever amount is necessary to accommodate the required expansion in economic activity.
• This means that GDP growth does not distinguish between productive activity and non-productive activity. This is true in all economies, but most economies have two mechanisms, hard budget constraints and a mark-to-market process, that prevent non-productive activity from becoming a substantial share of all economic activity included in the GDP calculations. These mechanisms ensure that reported GDP growth is almost always a system output, not a system input, and that it reflects the real performance of the underlying economy in a way that we find meaningful.
• Because these two mechanisms do not function normally in China, variations in its reported GDP growth tell us almost nothing about the performance of the underlying economy and its future prospects. In fact, in the case of China the most meaningful output generated by the system is the amount by which debt has to increase in order to generate a unit of additional GDP activity. Variations in this amount tell us more about the performance of the underlying economy and its future prospects than variations in reported GDP growth.
• On a comparable basis, growth in China has already dropped substantially, probably to below 3 percent, but this will not be reflected in reported Chinese GDP until credit growth is reined in.

Now read on...

Register to sample a report

Register
Sign-in
Forgot your password?
Copyright 2024 GlobalSource Partners. All rights reserved. This report is prepared for GlobalSource Partners’ clients and may not be redistributed, reproduced, stored in a retrieval system, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express written consent of GlobalSource Partners. This report is distributed simultaneously to our website and other portals used by GlobalSource Partners. The information herein was obtained from various sources and is believed to be reliable but GlobalSource Partners does not warrant its completeness or accuracy. Neither GlobalSource Partners nor any Country Analyst, officer or employee accepts any liability whatsoever for any direct, indirect or consequential damages or losses rising from any use of this report or its contents.