How China’s Slowdown Is Worse Than You Think

How China’s Slowdown Is Worse Than You Think

On the surface at least, China’s economy grew at a respectable 7 percent in the second quarter, beating expectations and right on track for the government’s annual growth target.

Bingo!” was how the Xinhua official news service greeted the data in a Tweet shortly after the number was released.

But look under the bonnet and China’s economy may actually be growing much slower. When GDP is unadjusted for price changes — known as nominal GDP — growth is running 2 percentage points weaker than last year, according to data compiled by Bloomberg. On a real basis, or when inflation is factored in, the picture looks much better with GDP a mere half a point behind last’s year’s pace.

One reason being touted to explain the gap is that China miscalculates the so-called GDP deflator, a broad measure of prices in the economy.

Capital Economics Ltd. argues that China’s GDP deflator is underestimated in periods when import prices are falling less than producer prices, hence the boost to real GDP.

“It’s an esoteric point, but one with big implications: if the deflator is understated and nominal GDP growth is not, real GDP growth will be reported as higher than it really is,” Mark Williams, Chief Asia economist at Capital Economics in London, who formerly advised the U.K. Treasury on China, said in a note.

In other words, China isn’t netting out the changes in import prices when measuring overall price changes in the economy.

Source: How China’s Slowdown Is Worse Than You Think – Bloomberg Business