The National Bureau of Statistics is bringing China’s gross domestic product data closer to international standards, but will likely ignite some controversy along the way.
On Friday, the bureau is scheduled to issue economic data for the first quarter, and for the first time it will include a measure known as the quarter-on-quarter seasonally adjusted annualized rate of growth of gross domestic product.
Why does that matter? Well, GDP is the most complete measure of the size and growth rate of the Chinese economy, and China’s GDP growth rate—which has consistently hit 10% or more a year—has been the most potent symbol of its rapid rise. But till now, the growth rate of China’s GDP each quarter has not been measured in a way that is comparable with that of the U.S. or other major economies. That’s because the statistics bureau has compared the size of GDP in a given quarter to its size in the same quarter a year earlier—a “year-on-year” measurement—whereas the U.S. Bureau of Economic Analysis, for example, compares GDP in a given quarter to the one immediately preceding it, adjusts it to take into account seasonal factors, and multiplies it by a compound growth formula to come up with an “annualized” figure.
That might sound more than a little technical. But the differences between the two approaches have serious implications for understanding the state of the world’s second biggest economy.
With the year-on-year numbers that China has been using, if the statistics bureau says, for example, that China’s economy expanded 9.8% in the fourth quarter of 2010, what they mean is that total output in the fourth quarter of 2010 was 9.8% higher than total output in the final quarter of 2009.
With the adjusted quarter-on-quarter number the U.S. and others use—and which China will start reporting from Friday–when the Bureau of Economic Analysis says the U.S. economy expanded at an annual rate of 3.1% in the fourth quarter of 2010, what they mean is that from the third quarter of 2010 to the fourth quarter of 2010, the U.S. economy grew 0.7%. Multiplying that by four to get the annual rate gives a figure of 3.1%.
There’s an extra wrinkle, though. To get an accurate picture of the growth rate, it’s important to compare like with like. In the year-on-year calculation, that’s easy enough. The first quarter of this year typically has the same number of working days, weather, and other variables that might affect output as the first quarter of last year.
In the adjusted quarter-on-quarter calculation, however, comparing like with like is considerably more difficult.
In the U.S., Thanksgiving falls in the fourth quarter of the year. Workers eat into turkey and turkey time eats into working days relative to the third quarter. In China, there are also national holidays—notably a week-long national holiday for the Lunar New Year that falls in January or February—that make it more difficult to compare the quarters. It’s not just the holidays themselves that can distort the data: different working patterns in the days before and after as factories gear up and wind down can also have a marked impact.
To correct for these seasonal biases, statisticians look at the pattern of historical data to try and work out the variation between quarters that is caused by seasonal effects (changes in working days and so on) and the variation that is caused by genuine changes in the rate of growth. Using these observations, they can seasonally adjust the raw data for the current quarter to get to the true rate of growth. (Actually, because these calculations are complicated, the statisticians have written computer programs that do the math for them.)
The Instant Noodle Economy
Sound tedious? The thing is, the two approaches to calculation actually produce results that are radically different. The year-on-year calculation is a glance into the distant past of the economy, a comparison of today with a year ago. The adjusted quarter-on-quarter calculation is a reflection of the current momentum of the economy, a comparison of today with yesterday.
A stylized example illustrates the point. For the sake of simplicity imagine an economy that only produces bowls of instant noodles, and that from the third quarter of 2007 to the second quarter of 2009 the output rate was as shown in the table below. Now, let’s look at the growth rates for 4Q08 calculated according to the two different methods. According to the year-on-year (or YoY) calculation, in 4Q08 the Chinese economy grew at a slightly sluggish but not particularly alarming 6.8%. But according to the quarter-on-quarter, seasonally adjusted annualized rate (or, ahem, QoQ SAAR). growth in the Chinese economy slowed to 0%.
The quarter-on-quarter calculation can also show the peaks and troughs in growth appearing at different points from the year-on-year data. In the noodle economy, the QoQ SAAR data shows the trough comes in 4Q08 with the economy grinding to a complete halt, and the rebound starts in 1Q09. The YoY data, in contrast, shows the trough in 1Q09.
The Real Economy
As it happens, the People’s Bank of China has been calculating the quarter-on-quarter figure for China, which is included in the central bank’s quarterly report on the macro-economy. A comparison of its data with the year-on-year data produced by the statistics bureau shows that our noodle-bowl economy example is not far from reality. As shown in the chart below, the QoQ SAAR data calculated by the PBOC shows growth hitting a trough of 3.7% in 4Q08, before rebounding strongly to 6.4% in 1Q09 and 14.9% in 2Q09. The YoY data from the NBS shows the economy hitting a trough of 6.5% growth in 1Q09, and recovering only slowly in the following quarters.
The different growth rates have far reaching implications for the markets and for policy makers. For the markets, the steady rapid growth shown by the year-on-year data has been fundamental to shaping perceptions of the China investment story. Would the jagged ups and downs traced out by the quarter-on-quarter data–suggesting the Chinese economy was veering wildly between overheating and overcooling–have inspired the same level of confidence?
For policy makers, the focus of attention should be the current momentum of the economy, shown by the quarter-on-quarter data. The Chinese government kept the economic stimulus in place way into 2010, claiming that the recovery was not yet stable. The quarter-on-quarter data, which shows the economy rebounding sharply from 2Q09, calls into question the wisdom of keeping the economic punch bowl spiked with stimulus loans for quite so long.
Lies, Damned Lies and Statistics
The publication of the quarter-on-quarter figure will be a definite step forward for China’s economic data. But it could also reignite controversy about the reliability of the statistics.
The calculation of seasonally adjusted data includes a larger role for judgment, and different assumptions can generate wildly different results. In one poll of investment bank economists conducted by The Wall Street Journal on the state of the economy in 1Q10, 12 of Hong Kong’s finest were equally divided on whether the Chinese economy had expanded or contracted. The PBOC’s data on the quarter on quarter growth rate shown in the chart above, which is taken from the report on the macro-economy in the second quarter of 2009, was also revised in subsequent reports as the Central Bank changed its view.
With faith in China’s official data low, there will be inevitably be questions about whether the NBS is abusing that scope for judgment to tweak the data in a harmonious direction. If, in 2008, the NBS was already publishing QoQ SAAR data, would they really have been willing or able to disclose that the economy was growing a socially destabilizing annual rate of 3.7%? Cynics assume the answer is no, but when the NBS roles out its new data set on Friday 15th, it will have a chance to prove them wrong.
–Tom Orlik. His book “Understanding China’s Economic Indicators” will be published in August