Official figures on track to meet China’s GDP target but assessing the actual growth rate remains challenging

The Chinese economy grew by 4.8 % y-o-y in the third quarter of this year. The reduction in growth from the previous quarter (5.2 %) largely reflects higher reference basis. China’s National Bureau of Statistics reports that 2.7 percentage points of growth came from increased consumer spending, 0.9 percentage points from fixed investment and 1.2 percentage points from net exports. Because nominal GDP grew by 3.7 % y-o-y, the imputed GDP deflator was still clearly negative, albeit slightly less than in the previous quarter. The pace of growth overall was still sufficient to assure that China will meets its official “about 5 %” GDP growth target this year.

BOFIT’s alternative indicator of GDP growth (an average of multiple estimates) in the third quarter was only a tenth of a percentage point below the official figure. There was, however, a large disparity among estimates depending on the methodology used. In the first nine months of this year, alternative GDP growth was still about one percentage point lower than the official figure.

The alternative GDP indicator is based on alternative deflators to convert official nominal growth figures into real growth. Construction of alternative deflators relies on two approaches, both of which assume that the nominal GDP figure and publicly available price indices are reliable. The first approach uses price indices that Chinese officials announce to use to convert nominal value added into real terms for the service, industrial, construction and agricultural sectors. These constitute the first set of alternatives deflators.

The second approach is based on a statistical method known as the Principal Component Analysis. It allows to combine a large set of price indices from various sectors of the economy into a few principal components. A new set of alternative deflators is then constructed from these components. Altogether, the two approaches provide us with seven alternative deflators, which are then used to calculate seven estimates of the real GDP growth. We post the simple average of these estimates and their range on the BOFIT website.

Notably, the real GDP estimates from the two approaches diverged more in the third quarter than previously. The first method yielded an average of 3.5 %, while the second produced an average of 5.7 %. The second approach yielded higher growth figures than China’s official number because the deflators it produced were exceptionally negative. The long deflationary trend in the Chinese economy, which has been sustained by weak domestic consumer demand and occasionally unhealthy industrial price competition, makes it difficult to estimate real growth and adds uncertainty to interpretations of the economic landscape.

The spread between alternative GDP growth estimates has widened recently

Sources: China National Bureau of Statistics and BOFIT.