Not everyone agrees that the Chinese economy really grew by 5.2 percent in 2023

Widespread doubts about the accuracy of official data on China’s GDP growth have prompted the market to make alternative calculations, which began this week after Beijing announced that economic expansion for 2023 was in line with its annual target of around five percent.

There is a consensus that the economy grew last year, driven by a recovery in consumption following the lifting of pandemic restrictions. This is easily visible in data collected outside the Chinese National Bureau of Statistics – such as the number of domestic flights or the growth of consumer-focused companies’ revenues, Bloomberg reported.

What is also agreed upon between official and independent estimates is that the sharp decline in real estate construction, along with tightened finances of local authorities and a drop in exports, represented downward pressure on the world’s second-largest economy. One of the skeptical studies also focused on investment data in Beijing, which shows that rising production and consumption on infrastructure outpaced asset resistance.

Some do not quite agree with this. According to Logan Wright, director of the Rhodium Group, total investment last year was largely unchanged, meaning that GDP data ‘significantly overestimated’ China’s growth in 2023. He told Bloomberg that the actual figure is likely around 1.5 percent.

Doubts about China’s official investment statistics, which measure spending on things like housing, factories, and infrastructure, have been fueled by frequent revisions in recent years, and the latest data imply an unusually large adjustment.

Investment in fixed assets or FAI rose three percent in nominal terms in 2023, the Statistical Bureau reported. However, it adds that the total amount of investment, at 50.3 trillion yuan (7.1 trillion dollars), cannot be directly compared to the amount reported for 2022 due to factors including ‘problematic data uncovered during statistical inspections of law enforcement.’

According to economists at Pantheon Macroeconomics, this adjustment is ‘incredible.’

Rhodium’s growth estimate for 2023 is at the lower end of a wide range. A sample of independent estimates collected by Bloomberg showed others with expansion figures ranging as high as 7.2 percent. This lack of consensus is one of the reasons why the official number remains a reference point for markets and continues their discussion about the Chinese economy.

Rhodium has a ‘bottom-up’ approach, measuring contributions from consumption, investment, and net exports to main growth based on lower-level data, such as real estate investments, credit card lending, and government spending. Often, the information still comes from official sources and is more reliable than the headline growth figure, claims Wright.

Different outcomes

However, others using a similar approach provide different growth estimates. The GDP China Nowcast indicator from QuantCube Technology, which is based on a range of unofficial data from air pollution figures to delivery and text analyses of online reports, ‘approximately aligns with official releases’ this year, the company said.

Doubts about Chinese GDP data typically rise when the economy slows, and skepticism peaked after Beijing reported a growth of three percent in 2022 despite widespread quarantines at the time. Strict measures against the coronavirus reduced GDP by 3.9 percent that year, Bloomberg reported.

A lower growth estimate in 2022 may mean that the figure for 2023 will be higher. One example is the bottom-up estimate from Fathom Consulting, based on official data series that econometric techniques suggest are less prone to manipulation. Their estimate: growth of 7.2 percent last year, following growth of 0.9 percent in 2022.

– These base effects are now over, and our estimate for 2024 returns to ‘more normal’ rates, of around four percent – said Juan Orts, an economist at Fathom.

Some economists doubt the accuracy of bottom-up measurements altogether. One reason: as the Chinese economy progresses, the structure of activities shifts.

About a decade ago, the ‘Li Keqiang index’ was in vogue, named after the former Chinese premier, who was quoted as relying on estimates of electricity consumption, the volume of railway freight, and the growth of bank loans as a substitute for GDP, but it has fallen into obscurity as the Chinese economy now consists mainly of services, and heavy industry plays a smaller role.

Whose deflator is best?

An alternative approach is to take China’s official nominal GDP figures (which are not adjusted for inflation) and then apply an independent price deflator to arrive at a real growth estimate. This approach gained popularity before the pandemic when the Chinese official deflator began to be seen as a tool for smoothing the rate of real GDP growth.

However, there is still no agreement on the best deflator.

Pantheon Macroeconomics says that real GDP grew by about 4.9 percent last year, using its deflator, but TS Lombard arrived at 3.6 percent using its own adjustment formula.

At Goldman Sachs, economists experimented with a measure of growth based on data not from China, relying on import figures from China plus a measure of correlation between exports and growth. The result in recent years has been ‘fairly consistent with official GDP growth,’ they concluded in an October report.

Other estimates based on consumer goods spending and industrial production were ‘modestly lower’ than official data. ‘How much has the Chinese economy slowed?’ they asked. ‘It is difficult to answer this simple question.’