Veracity of Chinese Output data and Renminbi Valuation

The reliability of Chinese official statistics is the topic of a recent Economist article (An aberrant abacus, May 1, 2008). Given its sheer size and diversity, it is understandably difficult to compile China’s Gross Domestic Product (GDP) figures. The contentious issue is whether the Chinese government deliberately overstates GDP figures. For instance, some commentators accused the Chinese government of deliberately overstating GDP figures in the 1990s, understating GDP growth in the early new millennium, and, more recently, smoothing the 2008 first-quarter GDP figure to mitigate the effect of severe snow storms and softer net exports.

There is circumstantial evidence that China is improving the accuracy its office GDP figures. For instance, the actual size of the Chinese economy was under scrutiny again on December 20, 2005 when the Chinese National Bureau of Statistics announced a 16.8% upward revision of the China’s GDP in 2004 due to the previous under-estimation of the services sector. In April this year, the Bureau revised up the 2006 and 2007 growth rates  by 0.5%. While the effort of offering more accurate GDP figures is welcomed, the revision hardly resolve all the doubts about the reliability of official data.

A new twist comes when, with much less fanfare, China became a much smaller economic giant as its economy shrank by about 40% in mid-2007 by stealth. It happened when the most recently collected price data by the World Bank group showed that China’s purchasing-power-parity-based GDP is much smaller that what it thought to be. We are not in a position to dig deep into the issue here. One thing for sure is that China is not alone in the quagmire of its GDP uncertainty. The accuracy and veracity of Chinese GDP figures remain a point of strenuous debate in the foreseeable future.[i]

Menzie in a recent BLOG noted that a wide swing in the Chinese GDP figures has substantially implications for evaluating the equilibrium/fair Renminbi exchange rate. Specifically, he perceptibly pointed out that the degree of Renminbi misalignment reported in our joint work Cheung-Chinn-Fujii will be substantially reduced. With the most recently released World Development Indicators, our co-author Eiji re-estimated the renminbi exchange rate misalignment. The two figures below compare the results from the original study and those from the latest dataset. The first figure in fact is used in Menzie’s blog and indicates the possible reduction in China’s 2006 misalignment when the Chinese 2006 new PPP-based output figure is used. The second figure is based on all the new PPP-based output data. It is quite obvious that, with the updated PPP-based output data, the Chinese real exchange rate given by the relative price level was undervalued in the last 10 years or so but the degree of undervaluation is relatively mild; especially compared with the one implied by the old data. We expect to have all the results in the original paper updated shortly.

  At this stage, it is worthwhile repeating a few points we made in Cheung-Chinn-Fujii. First, the data revision reinforces our assessment that, once sampling uncertainty and serial correlation are accounted for, there is little statistical evidence that the renminbi is undervalued. Second, the evidence does not prove renminbi is not undervalued, either. Indeed, the result should not be surprising because it is known that economists do not have a good model explaining exchange rate behavior and, thus, it is extremely difficult to pin down what the “equilibrium” value of the currency might be. Third, “the finding of a highly uncertain equilibrium real exchange rate buttresses the case for a prudent, cautious exchange rate policy that avoids abrupt changes in the Chinese economy.”

image004_29.gif

image002_46.gif


     

[i]           The concern about data reliability is not unique to China or emerging economies, in general. The May 4 Barron’s (“Work of Art” by Alan Abelson) has the following discussion about “The Employment Situation: April 2008” reported by the US Bureau of Labor Statistics: “Actually, the praise really belongs to the unknown (at least to us) and certainly unsung numbers-bender who crafted the so-called birth/death adjustment, supposedly created to capture the additional jobs of firms too new to be captured by the survey. As it has demonstrated time and again, it’s much more a product of the imagination than of dull data, as, of course, any worthwhile work of fiction is. We have on occasion pointed out the contribution the birth/death adjustment has made to the payroll total, but we have trouble remembering when the additional slots it conjured up were anywhere near as massive as they were in the April reckoning, when it “generated” 267,000 jobs. Put another way, ex the adjustment, last month’s job loss would have ballooned to 287,000. Bit of a difference, eh? Just one illustration points up the, shall we say, peculiarity of what the BLS adjustment has wrought. According to the birth/death model, 8,000 jobs were added in April — are you sitting down? — in the financial sector. Which, we assume, will come as a stunning surprise to the gosh knows how many poor souls who have been laid off by the banks, the brokerage houses and the rest of the not-very-robust financial fraternity. Must be something really wrong with our vision, moreover, since new firms in that sector appear to be conspicuous by their absence.”

4 Responses to "Veracity of Chinese Output data and Renminbi Valuation"

  1. Rachel   May 12, 2008 at 3:43 pm

    Great post – I’ve enjoyed the preliminary updates to the paper as posted on Menzie Chinn’s page. So I take it you don’t see a need for a one-off revaluation. Are you worried about the appreciation expectation pressure that seems now to be making Chinese monetary policy management more difficult?

  2. Yin-Wong Cheung   May 12, 2008 at 11:50 pm

    Thank you.Undeniably, the appreciation expectations pressure presents considerable challenges. Nonetheless, a substantial revaluation may bring more ills than expected – especially taking the fragility of the financial sector and intense social tension into consideration.Also, the effectiveness of a RMB revaluation in reducing the inflationary pressure and the trade imbalances is not 100% clear.

  3. Chen   May 13, 2008 at 1:50 pm

    Challenging the reliability of Chinese GDP is like opening Pandora’s box. If all the academics are as careful as you and your co-authors, we shall see a flood of revised articles. But still, we shouldn’t stop the pursuit of better GDP numbers…

  4. Yin-Wong   May 13, 2008 at 10:54 pm

    I hope – at least we should be circumspect about how strong an inference we can get from these data…