October 2015

China’s True Growth Rate: Is It Really 7%?
Hideaki MATSUOKA, Tsuyoshi MINAMI and Kengo TAHARA
Japan Center for Economic Research The paper examines China’s announcement of 7% real GDP growth during April–June 2015 in two ways: (1) a recalculation of the GDP deflator and (2) withreference to the Li Keqiang index. As a result, we found that the true growth rate isprobably 0.5 to 2.2 points lower than the official figure (as shown in Figure 1).
 Even if government statistics are to be trusted, 1.4 points of the 7% growth inApril–June came from the financial sector. Given the Chinese stock market crash,
the economy is unlikely to have maintained 7% growth in July–September.
 Contributing to market instability is the dearth of disclosed GDP-related statistics.
Chinese authorities need to enhance the transparency of its data.

GDP figures disclosed by the National Bureau of Statistics of China are quite deficientby international standards, and their correlation with other economic indicators isunclear. In the following, we assess the validity of the government’s 7% GDP growth
announcement from two angles: a recalculation of the GDP deflator and with reference
to the Li Keqiang index.
Figure 1: Estimates of China’s real GDP growth
10(%)

98
7.0

7
Range of estimated growth
by JCER

66.5

5
4.8
4
12:1

13:1

14:1

Sources: Japan Center for Economic Research; Haver Analytics

Chinese official statistics
Maximum value

Minimum value

15:1 15:2(quarterly)

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October 2015

Assessment 1. Examining the GDP Deflator
Capital Economics, a London-based economic research consultancy, suggested thepossibility that China’s GDP deflator may be understated, having failed to account forthe decline in import prices1. If this is true, then the announced GDP figure, in realterms, will have been too high. Capital Economics calculates that economic growth inJanuary-March 2015 was actually 1 to 2 points lower than the published figure.
Doubts about Beijing’s announcements emerge because the components of the GDP
deflator (such as the respective deflators for consumption, investment, exports, andimports) are not disclosed. Below in Box, we outline our attempts to calculate deflatorsfor various components of GDP and compile our own GDP deflator for China,
comparing it with the official figure.
A comparison of Beijing’s official GDP deflator and our estimate is shown in Figure 2.
The figure at left is the synthesis of our estimates for the consumption, investment,export, and import deflators—that is, all the demand components of GDP that should beincluded. It is higher than the official GDP deflator from April–June 2014, being 1.7
points higher in January–March 2015 and 1.5 points higher in April–June. Interestingly,
when the import deflator is left out, estimates closely approximate the official figure, asshown at right. This leads us to suspect, as suggested above, that China has failed totake import price fluctuations into account in calculating its deflator.
Figure 2: Estimates of GDP deflators<Estimates of GDP deflator which do not deduct imports><Estimates of GDP deflator>
12(yoy, %)1210(yoy, %)10Actual8

Estimates

86

6

4

4

2

20
(Quarterly)

-2
11:1

12:1

13:1

14:1

15:1
15:2

ActualEstimates

0-2(Quarterly)
11:1
12:1
13:1
14:1
15:1
15:2Note: Estimates are weighted average of consumption,
gross capital formation, and exports deflaters.

Note: Estimates are weighted average of consumption,
gross capital formation, exports, and inports deflaters.

Deducting the estimated GDP deflator growth from the official nominal GDP growth
generates estimates of real GDP growth, which are below the official figures for recentquarters. The estimates show real growth was 5.3% in January-March 2015 and 5.5% in
April-June instead of official “7%”.
Bloomberg, on 16th July 2015 “How China’s Slowdown Is Worse Than You Think”
http://www.bloomberg.com/news/articles/2015-07-17/how-china-s-slowdown-is-worse-than-you-think1

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Japan Center for Economic ResearchOctober 2015

Box: How Quarterly Deflators Were Calculated
Step 1: Calculating Levels of Real GDP by Component
China does not publish GDP deflators for the various demand components (Table 1), so
our task began by estimating GDP values in real terms for each component. We used2010 as the base year (when the real and nominal GDP figures were the same) andcalculated real values using the figures for the contributions each component made tooverall growth (which China does publish).
Table 1: Data availability of China’s GDP components【Calendar Year】
YoY contribution
growthto GDP
Level rate (%) growth (%)

Total GDPComponents
by Industry
Components
byexpenditure

Real
NominalDeflator
RealNominalDeflator
RealNominalDeflator

○
○
○
○
○
○
×〇
×

○
○
○
○
○
○
×〇
×―――〇
○
○
○（※）
○（※）
○（※）

【Quarter】
Level○
○
○
○
○
○
×××

YoY
contribution
growthto GDPrate (%) growth (%)

○○
○
○
○
○
×
×
×―――○○○○××

QoQ qrowth(Sesonallyadjusted)(%)○（From 2011）
××××××××

Notes: ○ shows available（or easily calculable）, × shows unavailable data.
※Only net exports are available and export/import are unavailable.
Components by expenditure include final consumption, gross capital formation, and net exports.
Components by expenditure include primary, secondary, and tertiary industry.
are the items that are estimated in this report.
Sources: National Bureau of Statistics of China, Haver Analytics

Step 2: Determining Export and Import Figures from Net Exports, Ascertained in Step 1
Regarding the components of nominal values and contributions to real GDP growth,which we used in Step 1, the only figures China releases in the area of trade are net
exports; Beijing does not provide a breakdown of exports and imports. We thus referredto the exports and imports of goods and services in international balance of payments
statistics, regarding them as the nominal export and import components of GDP. To
ascertain the export and import deflators needed to obtain real term figures, we referred
to price indices for exports and imports. The resulting real net exports were slightlydifferent from our calculations in Step 1, so the discrepancies were split and apportioned
evenly to exports and imports.
Step 3. Calendar-Year Deflators for Demand Components
We then created annual deflators for each of the GDP demand components, based on the
published nominal statistics and our calculations (made in Step 2) of the real figures.

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Japan Center for Economic Research
October 2015

Step 4: Quarterly Deflators for Demand Components
The calendar-year deflators deduced in Step 3 were then used to estimate quarterly
deflators for each demand component. Specifically, we first estimated the relationshipbetween the annual deflator and various price indices, calculating the consumption
deflator with reference to the consumer price index and the investment deflator with theprice index for fixed asset investments. The estimates by price indices seem to fit wellwith the deflator calculated in Step 3 as shown in Figure 3. Second, we calculated
quarterly deflators using quarterly price indices and the parameters estimated from
calendar-year data.
Figure 3: Deflators estimated by major price indices<Consumption deflator estimated by CPI>
10864
20-2-4-6<Gross capital formation deflator by fixed assets investment prices>(% change)
ActualEstimation(C.Y.)
2014
19972001
2005
2009
2013
Note: The estimated equation includes a constant term.

1210864
20-2-4（% change）

ActualEstimation(C.Y.)
199720012005

2009

2014
2013

Step 5: Verifying the Quarterly Deflators
Finally, we worked out a GDP deflator by compiling the quarterly deflators for eachdemand component, calculated in Step 4. This process applied the relative weights ofeach demand component, deduced in Step 1.

Assessment 2: Reference to the Li Keqiang Index
Chinese Premier Li Keqiang revealed in 2007—when he was the Party Committee
Secretary of Liaoning—that the GDP figures in the province were unreliable and that hethus used three other indicators: electricity consumption, the railway cargo volume, andloans disbursed by banks. These three indicators were combined into what has come tobe known as the Li Keqiang index.
Fernald et al. (2013) regresses China’s real GDP between October–December 2000 andJuly–September 2009 on two explanatory variables: (1) the Li Keqiang index, asexplained above, and (2) the lag (four quarters) in the GDP growth rate. The results
were then used to extrapolate real GDP growth since October–December 2009. The lag
is used to refer to past GDP trends for the factors not covered by the Li Keqiang index.
In other words, the analysis is an attempt to ascertain current real GDP growth in termsof past GDP statistics and recent economic indicators. The authors conclude that the
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October 2015official data through 2012 are consistent with the relationship observed in the past.
Based on their research, we have attempted a similar calculation, using the same
inferential parameters for the period up to July–September 2009 to update theextrapolation through April–June 2015. We made two estimates for the Li Keqiang
index, (1) a simple average of the year-on-year growth in electricity consumption,
railway cargo volume, and bank loans and (2) a synthesis index through principal
component analysis (Table 2).
Table 2: Regression results of GDP growth by Li Keqiang index
Explained variable：year-on-year growth rate of real GDP
Estimation (1)Estimation (2)Explanatory variable
Coefficients Standard errors Coefficients Standard errors
Growth rate of Real GDP-4
0.608(0.167) ***0.576(0.223) ***Li Keqiang
0.398(0.083) ***(Simple average)
index(Principal conponent analysis)
0.121(0.040) ***Constant term
▲ 0.770 (1.778)
3.674(2.015) *35
35
Number of Samples
0.559
0.418
Adjusted R-squared
S.E.of regression
1.495
1.717
Note: Standard error are those of Newey-West*** means significance at 1% level, * means significance at 10% level

Figure 4: Real growth estimated by two variants of Li Keqiang indices<Estimates using Li Keqiang Index by simple average> <Estimates using Li Keqiang Index by principal component analysis>
16(yoy, %)16

out of sample

14(yoy, %)out of sample

14

12

12

10

108

7.0 7.0 8

64.8Real GDP

4

Estimates by JCER
03:1

05:1

07:1

09:1

11:1

13:1

15:2
15:1

6.5 6.5

Real GDPEstimates by JCER

2001:164

4.827.0 7.0

001:1

03:1

05:1

07:1

09:1

11:1

13:1

15:2
15:1

Notes: The estimated period is from 2001 throuth 2009Q3.
Figures of 2009Q4 and after are extrapolated using the regression results.
Sources: Haver Analytics, CEIC

Our calculations were lower than Beijing’s official GDP figures for the most recent twoquarters (Figure 4). With index (1), our estimates closely approximated official figures
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October 2015

through 2013 but was significantly lower in 2014, dropping to between 4.5% and 5.0%
in the first half of 2015. Using index (2), we found that the economy grew by 6.5% in
the first half of 2015, which is still lower than the official figure of 7%.
There are limitations to the Li Keqiang index, of course, for it does not present a full
picture of economic conditions in China. Production may increase even when electricity
consumption is flat, for example, if factories begin using more energy-efficientequipment. None of the three indicators, moreover, adequately reflects the rapid shift of
the Chinese economy toward the service sector.
Dwindling Contributions from the Financial Sector
Even if official statistics are to be trusted, a breakdown of GDP by industry reveals that7% growth in the first half of 2015 was achieved thanks to special factors. A stock
market bubble led to a jump in transactions, pushing up the financial sector’s GDP bynearly 20%—as compared to a more moderate 6% for manufacturing and thewholesale-retail sector (Figure 5). Since there is a strong correlation between shareprices and the financial sector’s GDP, the market bubble likely helped to push up
China’s GDP to 7% (Figure 6).
Figure 5: Real GDP growth by industry
20181614121086420(yoy, %)7%Allindustries

Agriculture

Industry

Construction

Transportation &Telecommu-nications

Wholesaleand Retail
Trade

Hotels andCatering

Financial
Intermediation

Real Estates

Others

Notes: Figures are calculated based accumulated amount from the beginning of the year, ratio to the same quarter of the previous year.
The period is from 2014 Q3 throuth 2015 Q2.
Sources: Haver Analytics

Our calculations show that in April–June 2015, the financial industry contributed 1.4
points to the 7% growth—a 0.9-point jump over year-ago levels (Figure 7). Given theensuing market crash, such contributions will likely have dissipated, making 7% growthdifficult to achieve in July–September.

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October 2015

Figure 6: GDP of finance industry
and stock prices
24(yoy, %)20
16

Figure 7: Contribution to real GDP growthby industry(Dec. 19, 1990＝100)
6000
GDP of Financial
intermediation
5000
The Shanghai Stock
Exchange Composite
4000(Right scale)

8.0

3000

4.01282000(yoy, %)

Financialintermediation

7.0

wholesale &retailtrades

6.0

Other services

5.0

Construction

3.0
Industry

2.0
41000

00
06:1

08:1

10:1

12:1

14:1 15:3

1.0
0.0
14:1

14:2

14:3

14:4

15:1

15:2

Agriculture, forestry,
animal husbundly &fishery industries

Sources: Haver Analytics; JCER

Need for Greater Transparency
This paper analyzed China’s real GDP growth from two approaches: (1) a recalculationof the GDP deflator and (2) reference to the Li Keqiang index. The first approachyielded a growth rate of 5.5% for April–June 2015, and the second 4.8%–6.5%—both ofwhich are lower than the official figure of 7%. And even if official statistics are to betrusted, since 1.4 points of the 7% came from the financial sector, the subsequent stock
market crash is likely to have driven down GDP growth during July–September.
The dearth of official GDP statistics released by Beijing is a source of market instability
and is fueling uncertainties about the future of the Chinese economy. As such, it isdamaging to the authorities’ own wishes. If China seeks to become a true economicpower, it must enhance the transparency of the statistics it discloses.
Reference
Fernald, J., Malkin, I., & Spiegel, M. (2013) “On the Reliability of Chinese Output Figures,”
FRBSF Economic Letter,

2013-08.

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