- The Washington Times - Friday, February 5, 2010

China has acknowledged that its export-driven economy took a beating in 2008 and 2009, but Western analysts, most of whom are suspicious of Beijing’s willingness to concede downturns, think China may have even slipped into a recession.

Because of political pressures and different methods of measuring, Chinese economic statistics can be notoriously suspect when compared with Western numbers. But the consensus among Western economists, including earlier skeptics, is that China has experienced an especially strong rebound since early 2009 from the global recession.

The Chinese government reported in late January that its economy expanded by 10.7 percent during 2009, measured on a fourth-quarter-over-fourth-quarter basis.

While official data point to a robust recovery, Chinese statistics may have masked a significant economic contraction at the height of the global financial crisis, according to analyses by Thomas G. Rawski, an economics professor at the University of Pittsburgh, and China specialist Gordon Chang.

“I agree with the trajectory and the timing of the recovery,” Mr. Rawski said, “but the extent of the Chinese slowdown is far larger than suggested” by the official data.

Although China’s economic figures do not reveal a definitive contraction during the global downturn, Mr. Rawski thinks China experienced an outright recession, when its gross domestic product (GDP) declined during one or more quarters.

“China is experiencing a classic V-shaped recovery,” Mr. Rawski said. He thinks the downward portion of the “V” dipped into negative territory, probably during the first half of 2009.

One problem with China’s method of economic measurement is politically motivated fudging of the numbers, but another is a different method of calculation.

Other major economic powers measure growth from one quarter to the next, meaning that a recession will show up in the form of negative growth figures. But because China measures growth by comparing a three-month period with the same quarter in the previous year, a recession in one or two quarters could be masked by intervening quarters of robust growth. As a result, “negative growth” rarely or never happens in China.

For example, that 10.7 percent figure from China’s National Bureau of Statistics for the fourth quarter of 2009 was a year-over-year growth rate compared with the fourth quarter of 2008. Similarly, the 6.1 percent growth rate reported for the first quarter of 2009 was a year-over-year comparison with the January-to-March period of 2008. Likewise, the 7.9 percent growth rate for the second quarter of 2009 measures growth against the same quarter in 2008. The three growth rates - 10.7 percent, 7.9 percent and 6.1 percent - even if accurate, suggest a significant slowing of the economy in late 2008 and early 2009.

Regardless of accounting details, Mr. Chang and Mr. Rawski said, other Chinese economic figures are inconsistent with Beijing’s official picture of robust growth.

Mr. Chang pointed to plunging export numbers and evidence of flat retail sales. Mr. Rawski cited official data showing that electricity output during the first half of 2009 was lower than it was during the first half of 2008.

“If electricity output is declining, I find it hard to believe that GDP is growing far ahead of electricity production,” he said. That phenomenon hasn’t happened since the Asian financial crisis of the late 1990s, when Mr. Rawski also argued that official Chinese statistics were covering up a recession.

In a widely cited paper, “What is happening to China’s GDP statistics?” published in 2001 in the China Economic Review, Mr. Rawski questioned how China’s economy could have expanded by the reported 34.5 percent during the 1998-to-2001 period when, over the same period, energy use declined by 5.5 percent and employment increased by just 0.8 percent.

Mr. Rawski and Mr. Chang detected similar statistical anomalies during the recent global economic crisis, which ended during the second half of last year in large part because of the strength of Asia’s rebound, propelled especially by China.

During the intervening decade between the Asian financial crisis and the latest downturn, China consistently reported annual growth rates in or near double-digit territory. Mr. Rawski said he had no dispute with those growth rates.

And then there are the political motivations.

“They couldn’t admit to poor performance because the government believed it was necessary to maintain the image of a vibrant economy,” Mr. Chang said.

In early 2009, Chinese Prime Minister Wen Jiabao projected 8 percent growth for 2009, making it unlikely that official data would contradict him, Mr. Chang said.

However, at the time Mr. Wen issued his forecast, many reports from China revealed that tens of millions of workers lost their manufacturing jobs in coastal factories that were shuttered because China’s exports had collapsed. Such an acknowledgment of mass unemployment could invite rampant speculation from abroad about imminent social unrest.

As it happened, year-over-year growth in 2009 came in at 8.7 percent, indispensably achieved by the booming fourth quarter. That strong growth figure was “probably too good to be true,” Mr. Chang said. “The reported 10.7 percent rate catapulted them over the 8 percent line, with room to spare,” he said with a note of skepticism.

The national government thinks an 8 percent growth rate is needed to absorb the country’s expanding labor force, including migrants from the rural areas into large cities and manufacturing hubs.

“The 8 percent number has been repeated so many times, including by Chinese government officials, that it has taken on a life of its own,” said Nicholas Lardy, an analyst on the Chinese economy at the Peterson Institute for International Economics.

Mr. Lardy, who does not think China cooks its economic books in any substantive way, even to mask downturns, rejects the basis for the 8 percent growth requirement.

“There is no one-to-one relationship between China’s growth rate and the amount of jobs created,” he said. “That is too simplistic, especially for China.”

Mr. Lardy said China has not generated as many jobs over the past few years, compared with earlier periods, because its unbalanced economy is disproportionately geared toward huge investments in capital-intensive industries.

Ironically, he said, China could create more jobs with balanced growth of 6 percent, including a focus on labor-intensive service industries, than it is creating by pursuing economic policies aimed at achieving an 8 percent, or higher, growth rate.

Derek Scissors, an Asia scholar at the conservative Heritage Foundation, said China systematically underreports its economic activity, only to have to upwardly revise its growth rate after taking a more complete picture.

“In 2004, China conducted a nationwide census and discovered its economy was almost 17 percent larger than previously reported,” Mr. Scissors noted last week in a paper. “The service sector was found to be larger than previously thought, as was also the case in the 1993 census.”

Mr. Scissors says he thinks that China is “still undercounting” its economic growth. “A proper census would show that China’s economy has been larger than announced at the time for every single year in the reform period” that began more than 30 years ago.

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