In his latest, Michael Pettis wonders aloud what China’s real GDP is, given misallocation of capital, environemental degradation, political statistics, etc. Like Pettis, I argue that China’s GDP is overstated, for these reasons among others.
The combination of these two sources of GDP overstatement – uncounted environmental degradation and ignored NPLs – is pretty substantial. To show how substantial, assume that GDP has been overstated by anywhere from 2 to 4 percentage points over the past ten to fifteen years. This would imply that China’s GDP today is actually about 55% to 85% of its stated size – or to put it another way, that China’s economy is anywhere from 15% to 45% smaller than we think.
This is a pretty big haircut. I have no idea what the correct deduction is (none of my numbers seem especially implausible), but even very rough ballpark numbers suggest that China’s GDP may be sharply overstated. At the very least they also suggest that all those breathless predictions about when China will have the world’s largest GDP may turn out to be as simple-minded as the same predictions made about the USSR in the 1960s or, perhaps a little more plausibly, about Japan in the 1980s. And for the same reasons: in each case we start from the assumption that the country’s real GDP, inflated as it is by misallocated environmental costs and overstated investment numbers, is much larger than it really is. Much, much larger.
By the way notice that if we discount GDP by 20-40%, the astonishingly low household consumption share of China’s GDP – 35% in 2009 – rises to 44-59% – still very low by global standards, but not quite as surreal. Could it be that much of China’s GDP really is overstated, and with it total savings too?
[Update] And some more China bearishness here.