January Insight - China’s GDP Numbers - Much ado about 7 Percent


Now that China is the world’s second largest economy and may be headed to be number one, the world’s media, stock markets and investors have instigated a massive Dragon GDP watch.  There is a fundamental conceptual oversight about the China GDP growth rate which can mislead.
The world had grown accustomed to at least 8% GDP growth in China not only because that was considered the norm, but also because it was accepted as the magic number required to prevent political and social unrest.  When that number started to contract, it set off a reaction in the resource sector equity markets.  A quick look at the domestic media in most of the G-8 nations reveals a level of concern close to panic. 
The total increase in size of China’s economy should be emphasised rather than the simplistic GDP growth rate.  It is the new growth in the overall size of the Chinese economy that impacts on world demand.  
According to Money.CNN the highest level of GDP growth was 14.2% in 2007 where total GDP at the start of the year was US$ 3.5 Trillion.  The increase in the size of the Chinese economy in 2007 was US$ 487 Billion. 
Meanwhile, China’s economy in 2013 using Money.CNN’s numbers was US $ 9 Trillion.  Even if the growth rate has fallen to 7%, or even worse to 6%, then nevertheless the increase in economic activity for the year will be respectively $ 630 Billion or US $ 540 Billion.  
While there are long-term structural issues in the Chinese economy which raise red flags, at the moment there is too much emphasis on GDP growth. This fixation is driven by the media’s preference for short bullet points more suitable for Twitter. Lost behind this single number is the detail that a sophisticated debate about China’s economy demands. The end result is often that markets and investment decisions are being driven by a single digit rather than a complex set of data. 

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