China's GDP Is Probably Overstated By A Lot

A quick primer on compounding bullshit

This article won’t actually try to estimate just how overstated China’s GDP is, because I can’t really do that. What it will do is give you a rough idea of how overstated China’s GDP could be, and how that works.

For those who aren’t aware: China’s GDP numbers are bullshit and have been for a very long time, and everyone who knows anything about China knows it. They always come out in mid-January, about a month earlier than the underlying data could conceivably be collected and tabulated.

The fact that China doesn’t delay the official numbers to a date that’s actually believable, or occasionally allow itself to fall slightly short of its target, says…something about the information environment in China. I’m not sure what exactly, but there’s surprisingly little effort made to make the lies plausible.

China’s official GDP numbers for 2024 are out, and to nobody’s surprise, China exceeded its 5% growth target by the tiniest fraction of a percent.

The header image is from this 2019 article by the South China Morning Post. Synopsis: China has been significantly overstating its GDP growth for years, by an estimated 2% per year.

Non-Chinese economists, think tanks and private research orgs have already published their own analyses which mostly put China’s actual growth rate for 2024 in the 2.5-3% range, like this one from Rhodium Group that estimates it at 2.4-2.8%. More info on that analysis and how it compares to the official numbers here.

You may have noted an issue here: Rhodium’s estimate also came out in mid-January, so how could it be accurate? Short answer is that it’s very approximate, and the data that would be needed for a better estimate isn’t available anyway. More on that later.

Anyway, one of my new years’ resolutions was to write an article a week, I’m behind on that due to the fires in LA (I had to evacuate last week) and an upcoming trip tomorrow, and I’m exhausted, but ChatGPT, in its capacity as my life coach, just informed me that I haven’t been totally consistent about blogging so here we go.

The thing about those analyst reports is they tend to tell you how overstated China’s growth rate likely is, but not go the next step of estimating how much China’s total GDP is. Just how badly overstated is GDP is the growth rate is overstated is the growth rate is overestimated by around two percent a year? Turns out, a whole hell of a lot.

China’s official GDP growth rate, and the extent to which it’s overstated, have obviously varied from year to year. The following is an extremely simplified simulation of how badly overstated the total GDP can get over twenty years of five percent official GDP growth and three percent actual GDP growth. I’ll try and remember to use the word actual instead of real here, since “real” has a very specific meaning when it comes to GDP.

After 20 years, the actual GDP is around 69.5% of the official GDP. Again, these are made up numbers that might perhaps be in the ballpark of the actual numbers. This is not an estimate, just a thought exercise to illustrate why the discrepancy can be, and likely is, quite large.

You can see the actual and official GDP numbers increasingly diverge over time. Here’s why this happens.

This year’s actual growth rate can only compound off last year’s actual GDP, not GDP that never really existed. On the other hand, the fake component– that extra two percent– can compound off of both the genuine and fake components of last year’s GDP.

The CCP does this by manipulating a variety of metrics, but they can be broadly filed into three categories.

First, overstating economic activity, which directly boosts GDP numbers.

Second, understanding prices, and therefore inflation. This inflates the buying power– or in other words, the standard of living– of the Chinese people. On its own it doesn’t raise GDP– it would just mean that people are buying less and paying less for it– so it has to be couple with overstating economic activity.

The discrepancies pile up over time and become harder to conceal, which leads us to the third method by which GDP can be overstating it: just putting out higher GDP numbers and not showing their work. In the last few years, China has discontinued publication of more and more economic indicators that tell you things like how much stuff is getting made and bought, how much people get paid, how easily they can afford stuff, how many hours they work to afford stuff, and how many people are out of work altogether.

Simply put, nobody outside of a military/intelligence context hides data that’s favorable to them.

Note that a lot of this fraud happens at lower levels of government, which pass the data up from local, to district, to provincial, to the national government, in response to directives from the national government. Most people are surprised to hear this about a communist country, but China’s government, while effectively unitary, is actually very decentralized in how it operates.

The long and short of this is that nobody at the top levels of the CCP has anything like a full set of honest books telling them, in detail, how the fraud was conducted and what China’s actual GDP is. This fraud has a sort of mixed character to it: lower levels of government do this partly at the directive of the national government, but also partly to fool the national government itself.

An example: it came out a few years ago that China’s very population is likely to be significantly overstated. Here’s a quote from the US-based researcher behind that study:

Yi said local governments overstate their population to obtain more subsidies, including education fees they collect from the central government. He said that with over 20 social benefits linked to a birth registration, some families were using the black market to buy a second birth certificate online.

"The population numbers have been inflated mainly for financial benefits," Yi said.

Read that again: local governments were, in essence, committing welfare fraud against the central government.

The final thing the Chinese government can do is juice real GDP growth, which makes actual GDP go up. But that’s good, right?

Not necessarily. GDP growth via technological innovation, structural reform and moving up the value chain are good, and have also largely happened, although the structural issues are probably now getting worse, not better. But what I’m talking about here is GDP growth that is very genuine, but not very productive.

GDP is a measure of the total volume of economic activity, measured in dollars (or whatever money). It is agnostic about how that activity is financed, how much intrinsic value it has, and how profitable it is.

Hence, the government can boost GDP by flooding the economy with cheap credit, encouraging production of stuff nobody needs like “investment” homes that don’t get lived in, and pressuring companies to export at such cheap prices that they barely break even, or even run at a loss.

If you’re wondering why profit matters, it’s essentially a measure of how much value an enterprise produces above and beyond what it consumes. Profit– the excess resources consumed– can be reinvested in growth by using it to buy/make productive capital. Which is of course, a crucial precursor to GDP growth that isn’t fake.

So what should you take away from this? First off, China’s GDP is almost certainly overstated by a double-digit percentage, but it’s hard to get much more precise than that. Second, GDP itself is only part of the story, and a lot of China’s actual GDP consists of activity that is either minimally useful or minimally profitable, and in either case likely unsustainable.

Third, the standard of living of the Chinese people is heavily overstated, and most of them don’t entirely realize that because they don’t get to leave the country or use the international internet. That means the CCP is very unlikely to relax those restrictions on information and travel.

It also has an interesting implication for the sudden popularity of RedNote: the interactions between American and Chinese users may turn out to hurt China a lot more than they hurt the United States.

For more detailed analyses of China’s economy, I recommend Noah Smith, an economist who has made a particular study of China and writes top-notch explainers on a regular basis. Start with this one.

Ultimately, what this means for the future is extremely hard to say. China really does produce a lot of stuff, but the reliance on exports with narrow profit margins also makes it extremely vulnerable to tariffs– or sanctions or even a blockade for that matter. The only thing I can say with any certainty is the rather banal observation that China’s economy is more fragile than it looks.