Favourable GDP data reflect reality, says China

China’s National Bureau of Statistics on Wednesday rejected suggestions that the inflation gauge it uses is flawed and exaggerates the country’s real economic growth rate.

Before the release of Wednesday’s second-quarter gross domestic product estimate, China’s nominal GDP growth rate had plummeted from almost 20 per cent to 5.8 per cent since 2011, a much sharper decline than the inflation-adjusted figures that have trended downwards from 9.5 per cent to 7 per cent over the same period.

The difference between this year’s first-quarter nominal and real growth figures implied that the so-called GDP deflator — a broad measure of inflation that covers all types of goods and services — was negative, at -1.2 per cent, for only the third time in nearly two decades. That transformed the government’s 5.8 nominal growth figure into 7 per cent real growth — bang on Beijing’s growth target of “about 7 per cent” for the full year. But it also implied that China suffered from nearly unprecedented deflation in the first quarter.

Sheng Laiyun, NBS spokesman, declined to say what the deflator was for China’s second-quarter growth figure, which also came in at 7 per cent. But analysts calculate that it has stabilised at 0.1 per cent, compared with -1.2 per cent in the first quarter.

In other words, nominal GDP growth rebounded from 5.8 per cent to 7.1 per cent between the first and second quarters.

“The inconsistency between the GDP deflator and other price measures seems to have gone away in the second quarter, after having been rather extreme in the first quarter,” says Andrew Batson at Gavekal Dragonomics, a Beijing research house.

Andrew Polk, resident economist at the Conference Board think-tank in Beijing, noted that there had been a similarly sharp upwards adjustment in the deflator between the first and second quarters of 2014.

Mr Sheng said the NBS had done “diligent research” on doubts raised by other analysts about China’s deflator series, adding they had “a lack of understanding about our calculation methods”.

“There is room for improvement,” he said. “But in general China’s GDP deflator hasn’t been underestimated, nor has GDP growth been overstated. Both objectively reflect the real situation.”

Mr Sheng noted that China uses the output-based “production approach” to calculate its GDP, which works out value added from agriculture, industry and services, also known as primary, secondary and tertiary industry. This, he added, differs from the expenditure approach favoured by some other countries, which is composed of consumption, investment and net exports.