- Everyone cares to much about GDP data, but this is an awful indicator of growth.
- The reported decrease in GDP growth may mean the government is willing to de-emphasize GDP data.
- GDP data is one case, but producer deflation numbers say that they are still just all talk.
Chinese economic data grabs headlines when GDP is announced, but more interesting material trickles out at other times. April has seen both an encouraging development and a reminder that painful economic reform hasn't yet been undertaken.
You shouldn't believe in effective Chinese reform until you see it, and possibly not then. Most of the grand plans from last fall's Communist Party plenary meetings - e.g. having private capital cooperate more with the state, rather than compete more - won't work on paper, much less survive the perils of implementation.
Still, last week brought good news in the guise of what might seem to be bad news: all but one province missed announced GDP growth targets. Six of them did so by three percentage points or more. Heilongjiang and Hebei were willing to announce year-on-year GDP growth of barely 4% for the first quarter. In the fourth quarter of 2013, none of the provinces were willing to admit to gains slower than 7%.
First, the caveats. Gross domestic product is a measurement of the size of various transactions, not a measurement of prosperity. It's a (badly designed) statistical construct that doesn't cause job creation or anything else and is horribly misinterpreted. This is especially true in China, where economic data gathering and publication is warped by political considerations.
The GDP numbers from Heilongjiang and Hebei, and every other province, are thus a poor indicator of the state of the Chinese economy. That isn't why they matter. About 15 years ago, the State Council started to guide provinces to report at least 7% GDP growth, (wrongly) citing job creation and other factors. Since then, a lower bound on reported growth has become a political symbol.
The significance is not that GDP growth was disappointing, the significance is that provinces are willing to say it was. Their willingness lends credibility to claims of a political de-emphasis of GDP. And this de-emphasis opens the door for reforms based on efficiency, or ecology or equality for that matter, to be prioritized.
There was more information provided last week underlining where action needs to occur. Producer prices are said to have been falling for two years. According to the National Bureau of Statistics, 26 of 42 listed industries witnessed on-year deflation in March. Every province but Tibet reported producer deflation.
This is occurring at a time when wages have solidly increased on official data and the occasional independent check on labor market conditions seems to confirm it. The price of capital (in the form of the deflator for fixed investment) has been slowly rising. Brent crude prices dropped sharply in spring 2012 but have climbed since, so oil imports haven't been deflationary. By sector, agricultural production prices show little change in the past two years.
Deflation is due largely to industrial overcapacity - prices driven down by too many industrial goods. For the sake of economic health, output should fall and the breadth of the problem means firms in most sectors and provinces should shrink. If private firms are supposed to play an enhanced role, as promised at the plenum, some state firms must shrink fairly substantially.
Thankfully, overcapacity has recently and repeatedly been cited by the government as a key target for reform. But SOEs in particular are an area where otherwise loud reform promises are muted. And some of the same things being said now about cutting overcapacity in state-dominated industries were said a decade earlier and turned out to be meaningless.
Xi Jinping and company received their Party promotions almost a year and a half ago. It may indeed be the case that GDP is no longer sacred, which is welcome. But producer deflation, if accurately reported, says we're still living in the realm of words, not actions.