Who Thinks China's Growth Is Slowing?
A widespread consensus has developed around the view that China’s economic growth is slowing and that the leadership in Beijing will have no choice but to capitulate in the tariff war with President Donald Trump to avoid a further slowdown. Leading US news organizations (here and here) have sounded this theme as a kind of late summer siren song to lull people into thinking that Trump’s confrontational approach is bound to succeed at some point. The reality is that, as has been the case for the last few years, the case for China’s imminent economic difficulties is overblown.
The most widely cited piece of evidence for the new conventional wisdom, for example, is that fixed asset investment is slowing dramatically. Unfortunately, this assessment is based on a monthly data series released by China's National Bureau of Statistics (NBS), which is currently revising the method used to calculate fixed asset investment. The method that was used so far involved considerable double counting, which the authorities are paring back. The slowing growth of this metric, thus, tells us nothing, and assessments based on existing data are no longer meaningful.
There are three sources of growth in any economy: consumption, investment, and net exports. The problem is that data on China’s fixed asset investment, which include the value of sales of land and other assets, have increasingly overstated the expansion of the economy’s productive capacity. Nonetheless, financial analysts and others have relied on this series because it is the only high-frequency data available on investment. China’s data on gross domestic capital formation, which accurately measures the expansion of productive capacity, are available only on an annual basis and with a lag of five months.
According to NBS data, fixed asset investment grew by only 5.5 percent in the first seven months of 2018, the lowest in decades. In the first half of the year (January to June), fixed asset investment grew by 6 percent. But the price index for fixed asset investment rose by 5.7 percent, implying that real investment barely grew. This, however, is inconsistent with the more reliable NBS data, which show the expansion of capital formation, properly measured, accounted for about one-third of the 6.8 percent of China’s GDP growth.
When the NBS releases final data for 2018 (probably in about nine months), we are likely to learn that the growth of capital formation, properly measured, exceeded the growth of fixed asset investment, just as it did in 2017.