ANALYSIS: Can the World Trust China’s Economic Data?

A man walks in front of a real estate agent's window in Shanghai, on Dec. 4, 2012. (Peter Parks/AFP via Getty Images)

China’s economy expanded at a slower-than-expected pace in the third quarter, driven by higher retail sales and growing industrial production. But as financial markets assess the situation in the world’s second-largest economy, some observers are questioning the reliability of the data coming out of Beijing.

In a 2017 paper by the Federal Reserve Bank of St. Louis, staff economists opined that China’s National Bureau of Statistics (NBS) has “improved its source data and its collection practices,” bolstering the quality of final official statistics.

However, a lot has changed in the last six years. Recent actions by the autocratic regime suggest that Beijing is willing to go to certain lengths to hide specific data that might shed a negative light on the Chinese economy.

In June, the youth unemployment rate climbed to a record high of 21.3 percent, highlighting the economic challenges facing the younger population. This prompted the regime to bury the numbers and halt the publication of this data.

“I believe that the data is not reliable. However, that’s all we have to go on,” Antonio Graceffo, an economist and China analyst, told The Epoch Times, adding that analysts can sift through proxies to determine the accuracy of the Chinese Communist Party’s (CCP) data.

For example, during the COVID-19 pandemic, China claimed factory activity levels were normal. Still, other data revealed there was no pollution and very little commutes emanating from those places, Mr. Graceffo, a contributor to the publication, added.

In recent years, there have been alternatives coming from the private sector.

The Caixin Global Purchasing Managers’ Index (PMI), which determines the trajectory of the manufacturing industry or services sector, is one instance of a non-government measurement. Morning Consult, a data intelligence firm, tracks consumer sentiment by asking Chinese respondents their thoughts on the economy (it is modeled after the University of Michigan’s Consumer Sentiment Index).

A Deeper Dive Into the Data

China’s economic growth slowed in the third quarter as a sluggish property market and deflationary pressures weighed on the world’s third-largest economy.

According to the NBS, the Chinese economy expanded 4.9 percent in the July-to-September period, down from 6.3 percent in the second quarter. But this was higher than the consensus estimate of 4.4 percent.

On a quarter-over-quarter basis, the third-quarter GDP growth rate rose 1.3 percent, up from a downwardly revised 0.5 percent. This also came in slightly higher than economists’ expectations of 1 percent.

The better-than-expected headline number bolstered hopes that Beijing will achieve its annual target of 5.1 percent this year.

NBS researchers published a glowing statement championing the “strong leadership” of Chinese leader Xi Jinping and the rest of the CCP.

“All regions and departments accelerated efforts to foster a new development pattern, took solid steps to promote high-quality development, implemented macroeconomic policy regulation in a precise and robust way, and made efforts to expand domestic demand, boost confidence, and fend off risks,” the NBS said in a statement.

“As a result, the national economy sustained the momentum of recovery and improvement with positive factors amassing, as production and supply increased steadily, market demands continued to expand, employment and prices generally improved, and quality of development enhanced steadily.”

Retail sales rose at an annualized pace of 5.5 percent in September, representing the largest increase in retail trade since May.

At the same time, China is still flirting with deflation. The annual inflation rate was zero percent in September, and the monthly consumer price index (CPI) rose at a lower-than-expected 0.2 percent. Wholesale prices are also undershooting forecasts as the producer price index (PPI) declined 2.5 percent year-over-year.

But ING economists still expect full-year inflation to top 1 percent next year.

“Whatever does emerge from Beijing over the coming months, it likely won’t be quick enough to make any meaningful difference to 2023, and at best, it should be viewed as a pain management tool for the transition to a less leveraged economy. And that is a multi-year project,” they wrote in a note.

Industry and Property

Industrial output was unchanged last month, growing at a better-than-expected 4.5 percent year-over-year. Industry capacity utilization also edged up to 75.6 percent in the previous quarter, up from 74.5 percent. Manufacturing activity recently turned positive for the first time since March, as the NBS’s PMI recorded an expansion in September due to recent fiscal stimulus measures from Beijing.

Property investment continued to plunge, plummeting 9.1 percent in the first nine months of 2023 and falling short of market projections.

Country Garden, the nation’s largest private property developer, is on the cusp of defaulting on its $11 billion overseas debt as it has yet to execute a $15 million coupon payment to bond investors.

Evergrande, China’s second-largest real estate developer, continues to bleed red ink as it faces $300 billion in liabilities. After defaulting on its debts in 2021, the company initiated restructuring efforts, but industry observers warn that the plan is in jeopardy because of regulatory investigations into a property development subsidiary.

Fixed asset investment eased to 3.1 percent, down from 3.2 percent and falling short of the consensus estimate of 3.2 percent.

In 2023, the employment pressure on Chinese university students is unprecedented. The photo shows students in Wuhan looking for jobs in 2009. (STR/AFP/Getty Images)

Jobs in China

Meanwhile, the unemployment rate slipped to a near-two-year-low of 5 percent in September, down from 5.2 percent. However, the country is not sharing a complete picture of the labor market because Beijing stopped publishing youth unemployment figures.

“A decision to discontinue the youth unemployment figures just after they hit a record high doesn’t inspire confidence,” said Capital Economics in a research note.

Since the pandemic, the nation has been struggling with youth employment. Economists assert that there are two reasons for this trend. The first is that there has been an immense imbalance between the surplus of graduates and a slowing economic landscape that has not produced enough job openings. The second is that younger graduates are seeking white-collar employment opportunities, which are not aligned with the regime’s broader manufacturing aims.

However, Mr. Graceffo does not buy Beijing’s rationale for the higher jobless figure for young people, citing the contraction in the manufacturing sector for nearly all of 2023.

“Are their manufacturing sector jobs that are going unfilled because young people refuse to do them? That’s not the case,” he added.

Experts argue this is a problem of Beijing’s making as the regime has pushed for university enrollment for decades. The CCP’s attempts to clamp down on the private economy have also stifled the service industry. After a solid start to 2023, the services sector has been on a downward trajectory and is below pre-crisis levels.

“The message for China’s policymakers is clear: boosting graduate numbers while throttling services and subsidizing building is bad economics and worse social policy,” wrote analysts at the Council on Foreign Relations. “It will further distort China’s imbalanced economy, and fuel discontent among an age cohort on which China will depend for its future national vitality.”

That said, the 21.3 percent figure might be misleading, too, Mr. Graceffo noted. It could be as high as 40 percent.

“So, in China, you have people that left the workforce ostensibly because they can’t find a job. They just stopped looking,” he said. “And when we add those back to the 23 percent unemployed, you might have as many as 30 or 40 percent of China’s young people that are not working are either unemployed or just gave up.”

Market Reaction

Asian markets were quiet following the new economic data. The Hang Seng Index and the Shanghai Composite Index were roughly flat. Japan and South Korea’s markets were also trading sideways.

The worst might be over for China, says Mark Makepeace, the CEO of Wilshire Indexes.

“China has had success, and will become an important investment venue going forward, but in the short term, China does have some issues. We’re not seeing the sort of growth in the market we’ve seen in the past, but the potential is there,” he told CNBC before the latest data.

Trade War Woes

The Department of Commerce announced on Oct. 17 that it intends to restrict the sale of more advanced artificial intelligence (AI) chips to China as part of efforts to eliminate loopholes that have appeared since the U.S. government imposed restrictions on AI chip exports.

“The updates are specifically designed to control access to computing power, which will significantly slow the PRC’s development of [the] next-generation frontier model, and could be leveraged in ways that threaten the U.S. and our allies, especially because they could be used for military uses and modernization,” said Commerce Secretary Gina Raimondo in a statement, adding that the revisions will only affect a small portion of the AI chip market.

“The fact is China, even after the update of this rule, will import hundreds of billions of dollars of semiconductors from the United States,” she said.

The new rules are expected to impact many companies, including AMD, Broadcom Intel, Marvell, and Nvidia.

By erecting a barrier to a massive market for AI semiconductors, there are fears that Beijing could retaliate against U.S. companies conducting business in the country, effectively igniting a fresh trade war.

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