ast year, China saw its annual GDP growth rate increase for the first time since 2010, new economic development data from China’s National Bureau of Statistics shows. With a growth rate of 6.9 percent for 2017, a 10.8 percent increase in exports for the year, and unemployment at a five-year low, bureau experts concluded China’s economic situation was better than expected and said development is progressing well. But these optimistic headline figures mask significant challenges and risks.
At the provincial level, 2017 was plagued with fake economic development data scandals. Authorities in Liaoning, Inner Mongolia and Tianjin admitted they had fabricated economic data in previous years. Inner Mongolia inflated its government revenue in 2016 by a whopping 36 percent, and two-fifths of its “additional value of industrial output” for 2016 was simply made up. The Liaoning government admitted in early 2017 that it had inflated its GDP growth rate between 2011 and 2014. On January 11, Tianjin authorities admitted the GDP of one of its major industrial districts, Binhai New Area, was worth 665 billion yuan (US$105b), instead of the 1 trillion yuan ($159b) reported earlier – an inflation of more than a third.
Make no mistake. These local governments did not come clean about their creative accounting after suddenly finding their consciences. Rather, they need the central government to bail them out to pay off their debts, which have accrued based on inflated government revenue and over-optimistic prospects of local economic development. This shows that the real threat posed by high-level debt at local levels is far from over. As these debt problems become more serious, we might expect similar “confessions” from other local and provincial governments in the future.
Following its data manipulation scandal, Tianjin posted a 3.6 percent GDP growth for 2017. This was a sharp drop from the 9 percent growth it reported in 2016. As a major industrial metropolis, the economic difficulties faced by Tianjin suggest that China’s efforts to upgrade its economy have not been very successful.
In the past years, a major challenge to China’s economy has been draining financial investment from the real economy into the virtual economy, fueled by a high profit margin in the real estate and the financial sectors brought by runaway housing prices, and a liberal monetary policy. This combines with an investment-driven model to boost GDP growth to result in a highly leveraged economy – with a high level of debt. Throughout 2017, preventing financial risk has been a top priority for the central government, and the task is far from over. Not only do local governments continue to rely on the real estate sector for much of their revenue, but progress in the much-desired transformation into an “innovation-driven” economy has been slow.
A rebound in the GDP growth rate may look good on paper, but it’s too early to celebrate. In 2018, China should focus on addressing structural problems in the economy, rather than worrying about GDP growth figures.