By Clay Chandler
January 13, 2018

Chinese premier Li Keqiang startled global investors by declaring at a forum in Phnom Penh Wednesday that in 2017 China grew at a rate of around 6.9%.

Li’s statement was a surprise for two reasons: China wasn’t expected to announce a formal growth figure for 2017 until January 18. And Li’s growth number was at least a tenth of a percentage point higher than estimates of global analysts.

China’s annual growth rate has been slowing for the past decade and wasn’t expected to turn around. Last year, Chinese GDP slumped to 6.7%, the slowest rate of expansion in 26 years. The bounce in China’s GDP may have had as much to do with improvements in America’s economy as China’s. Rising US demand helped boost China’s 2017 trade surplus with the US to a record $276 billion.

Li’s estimate rekindled a long-running debate about the reliability of China’s GDP numbers. Earlier in the week, two key Chinese regions, Inner Mongolia and the northern Rust Belt province of Liaoning, acknowledged inflating economic data. For years, GDP figures reported by China’s 31 individual provinces have far exceeded the GDP reported by Beijing for the nation as a whole, making China the global economy’s prime example of the “Lake Wobegon effect.” Remember Garrison Keillor’s imaginary Minnesota town, where “all the men are strong, all the women are good looking and all the children are above average”?

Over the years, many experts—and more than a few Chinese leaders—have argued that China’s GDP figures are essentially meaningless. Li himself is among the skeptics. In 2007, according to a US State Department memo released by Wikileaks, Li—then Liaoning’s party secretary—told American ambassador Clark Randt he found China’s GDP figures unreliable. Li told Randt he preferred tracking rougher measures instead: electric power consumption, shipping activity and growth in bank loans to gauge economic activity.

The Economist was among the first to fuse those variables into a composite and call it the “Li Keqiang Index.” In recent years, many analyses of the three measures have suggested the real growth of China’s economy is both more volatile and significantly lower than official figures.

Financial Times columnist David Pilling has a new book reminding us that, for all nations, GDP is a contrived and misleading intellectual construct. Michael Pettis, a former investment banker and noted China expert who teaches finance at Peking University’s Guanghua School of Management, has long argued that China’s GDP numbers are especially suspect because, for the past ten years, Chinese growth has depended on higher and higher levels of debt.

You can get a flavor for the main points of Michael’s argument from this discussion at last month’s Fortune Global Forum in Guangzhou. You’ll find expanded versions of his argument here, here and here. The gist of Michael’s case is that while GDP statistics may tell us how “busy” China is in any given year, they don’t tell us how productive that activity will be over the long term. If China has squandered all the money it’s “investing” on “ghost cities” and “bridges to nowhere,” the consequences will show up in diminished prosperity—sooner if markets force creditors to mark down the value of their loans or later if creditors just sit on their bad debts and the economy stagnates.

Tsinghua School of Economics and Management economist David Li argues China’s high debt-to-GDP ratio isn’t cause for concern because China remains a young, developing economy with a high savings rate and, like Japan, has borrowed mainly from itself. China’s savings, he argues, are better plowed into domestic infrastructure where they can contribute to growth than US Treasury bills.

I can’t tell you who’s right. But as a long-time student of the Japanese economy, which also had high savings and borrowed mainly from its own people, I do worry that unless Xi Jinping is willing to grant greater scope to entrepreneurs and private businesses, China’s growth miracle, like Japan’s, could give way to “lost decades” of slow growth.

For China, the key to avoiding that “middle income trap” is innovation. If the nation can make the shift from manufacturing to high-value services, from “Made in China” to “Created in China,” the Li Keqiang Index will become obsolete.

* * *

Speaking of innovation, in Guangzhou, we explored the kaleidoscope of new technologies and business models emerging in modern China, and also the role of something more elusive: design.

At Fortune, we’ve been thinking a lot lately about the relationship between design and innovation. In March, we’ll put that topic front-and-center in an all-new conference: Brainstorm Design. The event, which will be hosted in Singapore in collaboration with editorial colleagues from Wallpaper* and Time, will feature heavyweight design thinkers such as Airbnb co-founder Joe Gebbia, Thomas Heatherwick, frog’s Harry West, Pentagram’s Natasha Jen, Tom Dixon, Museum of Modern Art design curator Paolo Antonelli and IBM’s chief design officer Phil Gilbert. We’ll bring together top executives and the world’s most brilliant designers to learn more about how great businesses embrace design not just as a matter of aesthetics, packaging or marketing, but as a core component of corporate strategy. Places are limited. You’ll find more about this unique new event and how to register at Fortune‘s Conference site here.

More China news below.

Clay Chandler
@claychandler
clay.chandler@timeinc.com

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