Defying all expectations, China’s GDP grew 7% in the second quarter—at least according to the official charade.
Electricity use and assorted proxies of industry suggest that it very probably didn’t grow that fast. But here’s the chart, including the official growth rate and the annualized measure used by most advanced economies, anyway:
It is an official charade because China’s GDP has long been recognized as a distorted measure of the country’s economic growth. The value “created” in the country’s economy is inflated by the fact that a good chunk of the stuff bought and built in China isn’t worth the official sticker price.
This is thanks to the government’s “implicit guarantee” of any investments that are political priorities. This gives investors, both corporate and individual, the confidence that the government will bail out any inconvenient losses. It encourages banks and individual savers alike to lend to wasteful projects, as long as an official imprimatur is looped in somewhere. It lets lenders accept these unprofitable projects at face value as collateral for more loans.
And thus, debt begets more debt—China’s nearly quadrupled from 2007 to mid-2014, to $28 trillion, McKinsey calculates. Outstanding loans using property as collateral now add up to 22 trillion yuan—about 40% of the total—according to Fitch, the ratings agency. That’s about five times what they were in 2008.
In a way, China’s quarterly GDP announcement is the meta-example of the implicit guarantee creating a moral hazard.
The Chinese government is the only major economy to set GDP growth targets each year. Throughout the year, government officials and the state press reiterate, or talk down, that GDP growth target depending on the political agenda. In decades past, these signals let local officials know how recklessly they should invest, or how brazenly they should lie about the results.
Report dazzling growth, get a promotion. Leave nose-bloodying interest payments for the next guy to worry about.
That’s changing now, as the Xi Jinping administration tries to “rebalance” the economy away from the dangerous investment binge its policies have encouraged. Those promotion targets are, as a result, generally getting more sophisticated and holistic, rather than focusing on eye-popping numbers; the Shanghai government has even scrapped the targets as a factor altogether. Yet the government still does the whistlestop target tour—for instance, premier Li Keqiang announced in early July that China will hit its 7% growth target for this year.
It’s a little unclear why the government, having committed itself to slowing the economy in order to embrace reform, needs these moral hazard-inducing GDP targets at all anymore.
If it’s okay for the economy to slow, why the ruse? Since the growth targets support ever-swelling multiples of debt, why not scrap them? Sluggish household consumption and plummeting private investment suggest that that Q2’s impressive 7% is not actually being driven by these crucial engines of sustainable Chinese growth—or convincing consumers to spend or small businesses to invest.
This raises the worrying possibility that the only people who are taking the guarantee of hitting 7% GDP growth in 2015 seriously are China’s leaders. Clinging to this fiction gives Xi and his colleagues the confidence that they’ll ultimately be able to bail themselves out, indefinitely.