Back in September, NPR’s Planet Money produced an episode where the program interviewed experts in the field and tried to make some sense of Chinese economy after the horrific crash in the country’s stock market this summer (and I did write a blog post back then about the stock market drop. Click here to read more).
One of the main questions raised in this episode is not about if China’s economy is slowing down. Because it is, and it’s an answer we all afraid that we know too well. The question here was: how slow are we talking about?
Planet Money interviewed Christopher Balding, an economics professor at Peking University, and Balding said it is as slow as an annual GDP of, listen up, 1 to 2 percent. Back in September when I first heard this episode while driving, I stepped on the brake so hard and almost caused a car accident when I heard this number. It is simply jaw-droppingly low. To here more, here’s the episode.
Today’s blog is about the third quarter GDP number in China, officially released by the government just this week. And 6.9 percent is what it came down to. Balding has his own blog, Balding’s World, where he discusses global finance and posts frequently. As a GDP enthusiast, a number guy and a pessimist, Balding relies on data he found more believable, and often much lower than the official numbers. Earlier this week, he referred to non-manufacturing sector data from the official governmental release, as well as from Caixin, a mainland business news media group that works with Markit to produce China’s PMI numbers (I have another post on this topic as well) and wrote a blog post discussing how the official third quarter GDP fails to reflect the economic reality in the country. And although what he said doesn’t represent my point of view, I do recommend it as a good read. I did find something he wrote that I agree with. In another blog post, he made a humorous, yet not entirely joking statement about how Chinese government came up with this number: 6.9 percent.
China takes the three bears approach to GDP announcements. “7.2% is just too high a no one would believe us. 6.5% is just too low and would cause concern about our economic stability. 6.9% is just right. Not too hot and not too cold.”
The number 6.9 percent came out with a very specific purpose: to keep the world calm. And if you ask me, this purpose is more than half-realized. I am not saying here that everyone just bought this number without any doubt. In fact, the reality is just the opposite, because no one did. As said in the Planet Money episode, “basically nobody believes the official government GDP figures.” I personally think 6.9 is too high. And clearly, Balding thinks so, too. I believe most people out there are just as skeptical as us.
But releasing a number of 6.9 percent is effective in combating opinions and beliefs out there that China is doing much worse financially. Essentially, it is combating those words like Balding’s. In his blog post, Balding said these official numbers are highly manipulated. I agree there’s a certain degree of manipulation. But here’s the thing: no government in the world is gutsy enough to completely fabricate a number and fool the world. So although I don’t believe in GDP increase of 6.9 percent, I do think 6.9 cannot be too far off. Maybe it’s around 6 percent, or maybe a high 5 percent, but right now, it is not as bad as 1 to 2 percent like what Balding said.
When China released the number, message like this was sent out to the rest of the world through media, where you can find headlines like this one:
China third quarter GDP-growth beats expectations at 6.9 percent
–– Financial Times, Oct. 19
And this one:
China’s GDP growth beats forecasts as stimulus supports spending
–– Bloomberg, Oct. 18
Headlines like these may not be viewed entirely positive, but it’s not enough to freak the whole world out. But why does that matter?
It matters because part of our economy is based upon outlooks and expectations. This is how loan works. If a company wants to have a construction project, they would go to the bank to get some cash. They can successfully get a loan when the bank has a positive expectation that the company will be able to pay back the loan some time in the future. This transaction is possible, because there is a bright outlook.
With the same idea, as long as China’s performance is along everyone else’s expectation and none of us enter the panicking mode, we might actually achieve a soft landing of Chinese economy.
There’s a popular saying among students at my j-school: “fake it till you make it.” Well, for Chinese economy, it’s a little similar. After decades of more than 10 percent annual development, Chinese economy is gradually coming to a “new normal”. Let that be 6 percent, or even 5, as long as a balance is reached, it won’t cause traumatic damages worldwide. And I think China may be reaching that balance sooner than we expect.
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