China's economy notched 6.9 percent growth in 2015

An investor at a securities company in Beijing. Photo: AFP/Getty Images

China's economy grew by 6.9 percent in 2015, compared with 7.3 percent a year earlier, marking its slowest growth in a quarter of a century.

Uncertainty about the Chinese economy, seen as a driver of the global economy — and whether the government can manage a slowdown — has been weighing heavily on global markets in recent weeks. Investors, in part, are trying to determine if China's slump will spread, dragging down the rest of the world.

The latest data is not likely to reassure investors that all is well in China, the world's second-largest economy.

After decades of double-digit growth, the Chinese economy is entering a new era of more muted growth. While the government's leaders have said that they are comfortable with this shift, the slowdown creates a host of unexpected challenges.

China's growth is decelerating as its traditional industrial businesses struggle with excess capacity and dwindling demand. A slump in new housing construction is hurting consumption of building materials including steel, cement and glass, even as home prices show signs of a rebound.

China's export base in lower-end manufacturing, once a powerhouse that drove growth and created jobs, has been hollowed out. Factories churning out goods like garments and furniture are losing competitiveness because of lower wages in Southeast Asia and South Asia.

Although consumer spending and more innovative private sector companies are expected to help China’s economy expand in the future, analysts worry that their development will be too slow to offset the current and painful industrial slowdown.

And the government's response could add to the challenges. The government has rolled out a raft of stimulus measures to help bolster the economy. But that only threatens to leave already struggling companies even deeper in debt.

Is China's economic data exaggerated?

Beijing had set an official growth target of "about 7 percent".

Chinese Premier Li Keqiang has said that weaker growth would be acceptable as long as enough new jobs were created.

But some observers say that its growth is actually much weaker than official data suggests, though Beijing denies numbers are being inflated.

Although there has never been definitive evidence that Chinese economic data is exaggerated, the widely-held theory says that China's National Bureau of Statistics (NBS) will overstate growth in a stability-minded effort to hide the truth about a slowing economy. So instead of relying on government reports, China-watchers analyze other metrics for a more complete picture of the country's GDP.

"Nobody knows for sure, but when we look at things that are harder numbers to fudge...our estimate is growth probably about 3.5 percent versus roughly 7," said Gary Shilling, president of economic research firm A. Gary Shilling and Co.

The NBS did not immediately respond to the request for comment on the allegations of inflated economic data, but there is a widespread perception that the department operates as a political messaging unit.

"We watch (the official GDP announcement) as closely as we do in some sense out of a sense of obligation," said Donald Straszheim, head of China Research at Evercore ISI. "I wasn't expecting to learn a great deal last night when these numbers came out."

Not only does China's NBS refuse to respond to inquiries, Straszheim said, but the statistics unit will announce only its total GDP growth figure — not the components of that number. "If you don't have the components, how can you have a total? And if you have the components, which would add to the total, why are they not publicly available?" Straszheim asked.

Strategies vary for divining China's actual GDP, with some economists parsing Beijing's reports for what they think are likely grains of truth, or even analyzing economic data from important trading partners like Australia. Commodity prices — particularly copper, iron ore, and to some extent oil — are another popular way of assessing Chinese growth.

For his part, Shilling said that his firm models China's possible GDP growth on measures of rail traffic, electricity consumption, coal consumption and debt.

Straszheim said his group uses data from sources it regards as largely independent from government pressure, pointing to commodity consumption among other measures.

But most of these indicators seek to measure the share of China's economy based on exporting, manufacturing, and capital investment — and Beijing has made no secret that it sees the country shifting toward an increasingly service-oriented economy. That could, in turn, potentially make it even harder for investors to know the truth about China's GDP.

"Doubts about China's economic data are mainly due to differences between nominal and real gross domestic product figures that account for prices changes," said Zhao Yang from Nomura.

For a lot of companies, what matters for them are the nominal figures amid deep industrial deflation and that's why many market players think the official figures are better than how things really are. Retail sales and investment both came in lower than expected in nominal terms, he said.

IMF outlook

The news comes as the International Monetary Fund said that it expected China's economy to grow by 6.3 percent this year and 6 percent in 2017.

The fund said that risks to the global outlook remain tilted to the downside, with the world facing three big adjustments: the emerging-market slowdown, China's shift to growth driven less by exports and manufacturing, and the Federal Reserve's gradual exit from ultra-low interest rates.

China's top leadership has signaled in recent months it may allow some additional slowness as officials tackle delicate tasks such as reducing excess capacity, but nothing that could threaten President Xi Jinping's goal of at least 6.5 percent growth through 2020. The world's second-largest economy will slow to 6.5 percent this year and 6.3 percent next year, according to the median of economist estimates.

Reaching the official 6.5 percent target "is fast becoming a challenge," Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong, said in a note.

China's economy is going through a "tough transition to make, but critical if growth is to be sustainable," former Fed Chairman Ben S. Bernanke said at a forum on Tuesday in Hong Kong. "You have to have a transition to more services if you want to keep the economy growing and providing jobs."

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