China’s economy could be $1 trillion smaller than it says.
Christopher Balding, a professor at Peking University, lays out the case in a new working paper that finds some very strange patterns in China’s official statistics, which have long been viewed with skepticism. He believes the government manipulated housing price data between 2000 and 2011 to produce lower inflation results. Balding makes four key observations:
1. Why doesn’t the housing price data reflect China’s massive migration? In the last two decades, the country experienced a major migration from the rural interior to coastal cities. But the country’s official statistics show rural home prices growing three times as fast as urban home prices between 2000 and 2011. Balding is skeptical that home prices in urban areas grew so much more slowly, especially when private measures show housing prices in Chinese cities increasing much faster.
2. Or its massive economic growth? Overall, China says private housing prices grew 8% between 2000 and 2011, at a time when its economy never grew less than 8% in a year, sometimes growing more than 10%. With reports of a real-estate boom, it’s implausible that inflation would run at 2.43%—and real housing prices would fall by almost 20%, as the data imply. Consider this: In 2012, the admittedly housing-heavy US economy grew 2.8%, and urban home prices increased nearly 3%.
3. Why is China over-weighting city citizens? When China aggregates how housing prices affect its citizens’ cost of living, it assumes 80% of them live in the city and 20% live in the country—every single year. Over the same time period, China’s urban population has grown from 36.2% to 51.3%. The 80-20 weighting allows officials to play down cost of living increases by emphasizing the supposedly low-cost-growth urban results. At the same time, it assumes its citizens spend more on “education and cultural articles” and almost as much on “clothes” as they do on housing.
4. How can China have so few renters? This a country where 230 million people, about 17% of the population, travel away from home to work each year. Why are only 12% of the population classified as renters? Balding thinks it’s because China’s statisticians want to use the lowest increases in home prices for the most people; home rental prices have grown 50% faster than homeownership.
All told, when Balding re-adjusts the data to take into account what he calls more accurate assumptions about where Chinese citizens are living and how much their homes cost, he sees an extra 1% of inflation each year. Over the decade in question, that eats up about $1 trillion in real Chinese growth. That should give anyone invested in China’s economy, figuratively or financially, a moment of pause.
Or, if you don’t believe him, prepare yourself to believe this fact from China’s national statisticians: From 2003 to 2011, the only consumer prices that rose in China were for food, which made up 99% of the official increase in consumer prices.