What Should We Be Worrying About In China (and India Too)?

China’s economy is the second or third biggest in the world (don’t believe anyone who says it is currently larger than America’s, and it’s reasonable to be suspicious that it’s larger than Japan’s).

One of the many problems with China’s macroeconomy is that the official data is systematically overstated. This is problem is well-known to economists (probably the best source on this is a blog called Balding’s World, which posts about overstatement of Chinese economic performance every few weeks). Do note that I’m not saying that China isn’t doing OK, just that it’s foolish to believe the official numbers.

Surprisingly, it’s even known to high ranking officials in the Chinese government.

No less than the second in command of China, the Premier Li Keqiang, has stated that Chinese GDP data is unreliable and “man-made”. To put this in perspective, the current Premier of China, second in command for the entire country, leading economic policy formulation, a Phd in economics, having spent essentially all his career inside public administration in various posts throughout China advises you not to trust GDP figures …

Li has even recommended that people look at highly disaggregated data, like electricity usage. When you do, the picture is not that rosy.

China is not the first country to do this. A lot of militarism by the United States during the Cold War is not attributed to the fact that our CIA was not sufficiently critical of the announced economic statistics coming out of the Soviet Union.

And, just this past week, news came out that India is gaming its GDP numbers too (because it wants to be seen as being as important as China).

In the end, I’m not saying we should throw out the GDP numbers of various countries, or that fraud is widespread. I am saying that some suspiciousness is always warranted. For most developed countries, there’s zero evidence of fraud. But, if it’s a less-developed country where you’re suspicious of the government or leaders to begin with, perhaps you should be suspicious of the numbers too. It’s no different than asking a kid how tall they are (where they almost always overstate their height), or a dieter how much weight they’ve lost: if you’re trying to change, improve, or catch-up, there’s a very common human tendency to overstate your success.

So, should we be worried about China (or India)? I think the answer is yes. These are big economies, and they haven’t been performing too well the last couple of years. Keep an eye on commodity prices. For example, we’ve seen the price of oil drop by over 50% over the last couple of years. Most of that is from the development of horizontal drilling (and less importantly, fracking) in the U.S. But don’t fool yourself that this isn’t covering up for weak demand from China. If that isn’t convincing, look at other commodity prices. They’re all dropping, while the U.S. is expanding, and Europe and Japan are holding steady. The demand of someone big must be off, and who’s left? China. India, Brazil. Russia.