Stockholm (Ekonamik) – It seems that despite the slowdown, the Chinese economy is still performing well. Data released by China’s National Bureau of Statistics show that China grew at a buoyant annual average of 6.6% during 2018. Although the trend is clearly in line with expectations of a slowdown in economic growth, these figures still suggest that China is growing. However, an analysis of the data reveals the issue is more complicated.
“Chinese policy-makers’ use of GDP targets means that Chinese GDP is always on-target and displays very limited volatility,” says Paul Diggle, Senior Economist at Aberdeen Standard Investments.
This is a recognised economic fact known as Goodhart’s law that “any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes” or more concisely that “when a measure becomes a target, it ceases to be a good measure”. In China, this has expressed itself in confirmed instances of public officials reporting fake data. In 2017, while admitting that the north-eastern province of Liaoning had inflated regional GDP figures for the years of 2011-2014, governor Chen Qiufa stated that “Officials produce the numbers, and the numbers produce officials”.
To overcome this problem observers of the Chinese economy have had recourse to a range of alternative measures. Beyond the Purchasing Manager Indexes (PMIs) that are usually reported for large economies, analysts are also known to consider more unconventional measures of economic activity such as electricity consumption, indexes based on satellite imagery of Chinese factories, among many others.
Based on Aberdeen’s own in-house measure it seems that China’s current slowdown may be bottoming out. At least that is the picture painted by the positive correlation between Aberdeen’s China Activity Indicator and Total Credit Impulse, a measure of credit flow that leads economic activity.
Investors should also be mindful of the potential upside risk. “Chinese growth is likely to recover in the coming one to two years, based on rising credit growth, tax cuts, public infrastructure investments and a de-escalation of the US-China trade war,” suggested Paul Diggle.
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