A Beijing-based economic theorist and financial strategist has said that growth of the gross domestic product (GDP) must not be considered as an insight of the Dragon's underlying economic performance. Michael Pettis, professor at Peking University and associate at the Carnegie Endowment Foundation said, “Piling up unsold and unsaleable goods or building empty airports may boost GDP in an economy whose financial system does not recognise bade debt, but it does not measure its performance.” He said it was wrong of analysts to “assume that changes in reported GDP reflect movements in living standards and productive capacity. In China, however, this is not the case.”
Pettis said that most economies have two mechanisms that force GDP data to conform to underlying economic performance. The first is hard budget constraints which set spending limits, drive companies that systematically waste investment out of business before they can substantially distort the economy, and the second is a market-pricing factor in GDP accounting that when bad debts caused by wasted investment are written down, the value-added component of GDP and the overall level of reported growth is reduced. He said, “In China, however, neither mechanism works. Bad debt is not written down and the government is not subject to hard budget constraints. It is the government sector that is mainly responsible for the investment misallocation that characterises so much recent Chinese growth.”
Pettis suggested that President Xi Jinping's new administration plans to rein in debt by abandoning the country's long-term economic targets and allowing gross domestic product growth to fall may come unstuck because “GDP growth is not the same as economic growth.” In China, he said the reported GDP growth has been overstated. “Were it correctly written down, by some estimates GDP growth would fall below 3 per cent.” He said that Japan too suffered from a very low consumption share of GDP and an over reliance on investment that, by the 1980s, turned into substantial misallocation.
Case in point are Japan and former USSR. The latter grew so rapidly after World War II that by the late-1960s it comprised 14 per cent of global GDP, similar to China today, and was widely expected to overtake the United States. Two decades later, its share of global GDP has, however, fallen by more than 70 per cent. “The implications are clear. China's growth miracle has already run out of steam. It is only by allowing debt to surge that the country is able to meet its GDP targets. This may be why President Xi has been eager to stress more meaningful goals.”
