China is expected to overtake the United States as the world’s largest economy by 2016, according to the Organization for Economic Cooperation and Development. This forecast is based on an average growth rate of about 8 percent over the next 10 years, including forecasts for 8.5 percent growth in 2013, and 8.9 percent in 2014.
By most accounts, those OECD forecasts are bullish. GDP growth slowed to 7.8 percent in 2012, and the nation’s leadership has set a relatively conservative target of 7.0 percent average growth by 2015. While China is notorious for understating growth expectations, recent data indicates that the conservative end of the spectrum may be more accurate.
To begin, China’s 7.8 percent growth rate in 2012 was the slowest pace in 13 years, and economic data released so far in 2013 has surprised to the downside. China reported GDP growth of 7.7 percent in the first quarter, but most economists have taken that figure with a grain of salt. Import and export data over the past couple of months has been incredibly suspect, posting double-digit back-to-back gains that did not match up with international accounts.
There are any number of theories about why official Chinese import and export figures didn’t match up to expectations. Chief among them them is a form of gamesmanship that involves exporters issuing fake invoices to people who want to transfer currency into the country. This creates false export data and allows companies to dodge around China’s tight currency controls. Evidence of this rests in a 93 percent increase in exports to Hong Kong in March — more than twice the amount of exports to the United States. China posted dubious export growth of 14.7 percent in April.
Chinese exporters also have an incentive to game the system and generate false import/export data because of value-added tax rebates. Last year, Chinese police busted a fake-invoice ring that had claimed tax rebates worth as much as 10.6 billion yuan ($1.71 billion).
The crackdown has apparently been successful. Export growth in May slowed to just 1.0 percent. Imports actually contracted 0.3 percent, surprising many analysts and suggesting that Chinese economic growth may be slowing down more than expected. Data suggests that the slowdown is the result of both weak overseas demand and underwhelming domestic demand.
Retail sales data released over the weakened showed a 12.9 percent gain on the year and a 1.17 percent gain on the month, which was about in line with expectations. Industrial production, an inflation-adjusted gauge of manufacturing output, increased 9.2 percent on the year, also in line with expectations. The producer and consumer price indexes declined 2.9 percent and increased 2.1 percent on the year, respectively. Both figures showed less inflationary pressure than expected.