Shuli Ren

China’s Xi May Soon Learn You Can’t Eat Statistics

President Xi Jinping has told senior officials to ensure that China’s gross domestic product growth outpaces the US’s this year. He’s determined to show that his one-party system is superior to Western democracy, and that the US is in decline, reported the Wall Street Journal.

At first read, this news is simultaneously amusing and hopeful to investors. More than 340 million people in regions that contribute to about 35% of China’s GDP are limited by some form of Covid-related lockdowns, according to estimates by Nomura Securities. In March — even before the lockdown in Shanghai — urban unemployment hit 6%, the highest since at least 2014. Meanwhile, US consumer confidence remains strong.

Are Xi’s remarks a sign that a big stimulus package is finally coming? Earlier this week, he called for an “all-out” infrastructure push to boost the economy. It’s hardly a tall order. Thanks to global inflation alone, China will beat the US in real GDP growth this year, however weak the underlying economy is.

Infrastructure spending is a great way to start. In the first quarter, investment in public facilities, such as water conservation and rail transport, rose a seemingly respectable 8.5% year-on-year. While that makes it look like local officials were doing something, much of the increase stemmed from higher costs in industrial products such as steel. Once we account for the 8.3% producers’ inflation, there was hardly any incremental boost to the real economy.

Exports are another good example. Surging global prices have kept export growth in value terms elevated, but volumes have fallen.

To calculate real GDP growth, advanced economies use a broad range of price measures for both inputs and outputs. China, on the other hand, uses a single deflator. As a result, during times of major global price changes, this method can significantly distort its real GDP growth numbers. The GDP deflator used in the US is now a lot higher.

Economists have been downgrading their growth forecasts for both China and the US recently. Those polled by Bloomberg now see the US growing 3.2% this year. Assuming stagnation in the second quarter, China just needs to notch roughly 4% in the second half.

That is not hard to do. When China calculates its quarterly GDP numbers, it uses the so-called production account, which prioritizes the value-add of each industry and brushes aside end demand.

As such, local officials can worry less about what households spend. Instead, they can incentivize factories, to say, make machinery tools, which state-owned entities can procure as fixed-asset investments. As to how useful these tools are and when and whether their purchase value will need to be written down — that’s a can that China can kick down the road. But for now, it’s a battle Xi can’t lose.

What does this mean for the broader economy? If beating the US in headline numbers, whether it’s Olympic medals or GDP growth, is what Xi most cares about, what does it say about his policy priorities? With rising job uncertainty and global inflation coming to bite, the Chinese are bound to feel their living standards are slipping.

Let them eat 5.5% GDP growth, Xi might say.