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Economy

Dollars do not lie -- the true picture of China's growth

Warnings of falling into 'middle-income trap' look increasingly ominous

BEIJING -- When Chinese President Xi Jinping attended a meeting of representatives from Liaoning Province at the recent National People's Congress, he made it clear in no uncertain terms that a return to the provincial government's practice of padding of economic data would not be tolerated.

That stance, however, sits awkwardly with the Central government's increasing tendency to release economic data in whichever currency suits best. 

China accepted foreign capital totaling 813.2 billion yuan ($117.91 billion) in 2016, up 4.1% from the previous year, the Ministry of Commerce said on Jan. 13. The data, which represent direct investment in China from overseas businesses, are hugely important. Under its open-door policy, the country has achieved a high level of economic growth through the introduction of advanced technologies and management methods from abroad.

In the past the government typically released data in dollars, due in part to a ban on yuan-denominated investment by foreign companies. But dollar signs were conspicuously absent from the January report. Data released in October for the January-September period, on the other hand, showed figures in both currencies.

In reply to an inquiry, the ministry said it has stopped releasing dollar-denominated data and called for calculation from the yuan figure.

Yet, all of a sudden, dollar-denominated figures were there when economic research firm CEIC released updated data for their clients. In other words, the ministry provided the data to CEIC but did not release them to the public.

Direct foreign investment in China in dollar terms contracted 7.1% to $126 billion in 2016 -- the first decrease in four years. Yuan figures, however, showed an increase.

Clues to why Beijing is being selective about which currency it uses to interpret data may lie in Xi's speech at this year's Davos meeting on Jan. 17. In the face of U.S. President Donald Trump's protectionist stance, Xi pledged that China will open its economy wider and accept more investment from abroad.

Announcing a first decrease in foreign investment in four years would have entailed serious loss of face for the Chinese leader.

The difference between figures listed in the two currencies comes down to the yuan's 6.6% fall against the dollar in 2016 and 10% over the two years since 2015.

Converting China's gross domestic product puts the difference in perspective. As the National Bureau of Statistics put the yuan's average rate against the dollar in 2016 at 6.6423, China's nominal GDP of 74.4 trillion yuan comes out as $11.2 trillion. In 2015, GDP was 68.9 trillion yuan or $11.06 trillion.

The Chinese economy, measured in dollar-denominated nominal GDP, therefore grew 1.3% in 2016 from the previous year -- a sharp contrast with the government's official announcement of 6.7% real growth and 8.0% nominal growth.

Dollar-denominated nominal growth marked a recent peak of 24.2% in 2011 and fell to 5.5% in 2015. It further slowed in 2016 to the lowest level since 1994 when the economy marked a contraction of 8.8% due to a steep devaluation of the yuan.

The yuan appreciated against the dollar after China shifted to a managed floating rate system for its currency in 2005. As China was growing rapidly at that time, the appreciation of the yuan contributed to a further rise in the rate of growth to 29.5% in dollar-denominated nominal terms in 2008, roughly three times the Chinese government's announcement of 9.7% real growth for the year.

The trend then began to rotate backward as the yuan weakened against the dollar from 2014 on the back of China's economic slowdown. The current weakness of the yuan is not a result of temporary fluctuations but a structural phenomenon accompanied by an exodus of capital.

Zhou Xiaochuan, governor of the People's Bank of China, speaks at a press conference during the National People's Congress in March 2017. (Photo by Akira Kodaka)

The ultraeasy monetary policy adopted by Beijing for several years to shore up the economy lies behind the frequent occurrence of economic bubbles, capital outflow, the weak yuan and all other developments, financial industry sources in Beijing said. The yuan's deprecation against the dollar is a natural development from the supply of too much yuan at low interest rates, they added.

China's money supply M2, which represents a total of cash and deposits, stood at 155 trillion yuan ($22.4 trillion) at the end of 2016, larger than the combined amounts of the U.S. and Japan -- $13.2 trillion and $8.4 trillion, respectively. The availability of liquidity in China is abnormal as its GDP amounts to only 60% of U.S. GDP.

The term "middle-income trap," where a developing economy struggles to kick on from around $10,000 in terms of GDP per capita, has become widely known in China after a governmental think tank used it. Xi and Premier Li Keqiang have repeatedly stressed that China will not fall into the trap.

Based on data released by the statistics bureau, China's dollar-denominated GDP per capita increased only 1.2% in 2016 to $8,126 from the previous year's $8,026 -- significant slowdowns from growth rates of 11.7% in 2013, 8.5% in 2014 and 4.5% in 2015.

Dollar-denominated GDP data put China in a totally different situation from the "stable growth" represented by yuan-denominated GDP growth of around 7% in real terms.

If the yuan's creeping depreciation against the dollar shows the strength of the Chinese economy, dollar-denominated data may be taken to describe its real state.

"China has a 50-50 chance of falling into the middle-income trap," Lou Jiwei, who stepped down as the finance minister in 2016, said in a speech at Tsinghua University in 2015.

His warning seems increasingly pertinent now.

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