What’s in a number? Quite a lot when it comes to Chinese GDP.
Especially when it’s 7%, which was the real growth rate of the Chinese economy in the first quarter of 2015, compared to the first quarter of last year, according to the Chinese National Bureau of Statistics, who released this much-awaited data point on April 15.
This news graced the front pages of business newspapers across the world, with many commentators noting that this is the slowest level of expansion since the second quarter of 2009 during the height of the financial crisis.
However, we’re not really sure why people pay so much attention to the headline GDP number; even China’s leaders seem to think it’s relatively unimportant, according to the infamous WikiLeaks memo from 2007 in which Li Keqiang — now China’s premier — stated that the GDP figures were “for reference only” and that he thought other measures, like electricity consumption, were more important measures of the health of the Chinese economy.
There is a common perception that the Chinese government has a habit of “smoothing” the quarterly GDP figures when compared to other measures of real economic activity like electricity production or steel demand, which can be can be seen in the chart below which shows change in quarterly real GDP against change in electricity year to date production (which is very similar in growth pattern to electricity consumption).
Real GDP looks very “smooth” when compared to electricity production…
Aside from the headline real GDP data, which is released as year-on year changes in percentage terms, the government also releases nominal GDP data, which is not as widely reported.
Unlike the year-on-year real GDP data, inflation is not removed from these nominal GDP statistics, which are reported in Chinese RMB, not as percentage changes.
The year-on-year changes in this nominal GDP data look much more representative of “actual” economic activity, as represented by change in electricity production, than the real GDP data, as can be seen in the chart below.
Is nominal GDP more representative of actual economic activity?
However, what is more significant in many ways is that in nominal terms GDP grew at just 5.8% in the first quarter — significantly lower than the headline real figure of 7%.
In normal circumstances, nominal growth rates are higher than real rates as they include the effect of inflation, but for only the second time in recent history (the first was at the height of the global financial crisis in 2009), China’s nominal growth has been weaker than real growth — 5.8% nominal versus 7% real — suggesting that the economy is in deflation.
The impact of commodities
Some of this will be due to the effect of lower commodity prices on the economy.
In the first quarter of 2015, the value in USD of imports of four major commodity groups — crude oil, oil products, iron ore and coal — was down by 44% on the first quarter of last year, despite the volume imported of these four commodity groups having actually risen slightly year on year. This difference in volume and value is accounted for by the effect of falling prices.
The chart below shows the relationship between nominal GDP growth on the LHS and growth in value of imports converted to RMB at nominal exchange rates on the RHS.
Do commodity prices cause lower rates of growth? Or vice versa?
Since the middle of 2011 there appears to be a relationship between the change in rates of nominal economic growth and the change in value of commodities imported. Whether it’s lower rates of Chinese economic growth that are contributing to the fall in commodity prices or lower commodity prices that are resulting in lower rates of nominal economic growth due to the effects of deflation we’re not quite sure; it’s quite possible that it’s actually a combination of both of these.
But it’s that really steep decline in the first quarter of this year, much of which is due to the fall in the price of oil, which we think may have played a significant role in causing the economy to slip into deflation which has resulted in the nominal GDP being lower than real GDP this quarter.