Skewed Data Hides Structural Problems in the Chinese Economy

Xiang Songzuo, chief Economist of the Agricultural Bank of China, raises a 'warning flag'
By Xiang Songzuo
Xiang Songzuo
Xiang Songzuo
May 29, 2016 Updated: June 21, 2016

China has serious structural economic problems, and Chinese and observers should not be misled by skewed GDP data.

At present, in China, we appear to be worried about the macro-economy. What are we so anxious about? The macroeconomic data indicates 6.7 percent growth for the first quarter! Compared with the latest data from countries around the world, 6.7 percent is No. 1.  No other country has a higher growth rate than China. Even if it is somewhat overstated, and the rate was only 6.5 percent, or even 6 percent, we’d still be the highest in the world. What are we worried about? I think we should worry about the underlying structural problems of China’s economy, not the macro data.

Bad Loans

We are seeing many statements and interpretations about why China’s economy is in trouble. In my view, the main problem stems from prominent structural contradictions within industries. Bank data clearly shows that challenges indeed exist for many traditional manufacturing industries, such as iron, steel, coal, photovoltaic, electrolytic aluminum and cement. Many companies, including steel and coal companies, have trouble making loan payments. Some businesses in these industries are doing well, but others are doing very poorly.

As for the real estate market, it is doing very well in Beijing, Shanghai, Shenzhen, and Hangzhou, but the market is very bad in a lot of tier-three and tier-four cities in the Northeast and Northwest.

Social Inequality

There is also the issue of the income gap. We have a lot of rich people in China today. Chinese worth $1 billion are considered super-rich, and their number has surpassed those in the United States. However, there are still 100 to 200 million people in China who are extremely poor. This gap between social groups creates very serious conflicts.


Another structural contradiction exists between China’s virtual and real economies. In fact, a lot of money does not flow into the real economy, but flows instead into the virtual economy, such as speculation.

In recent years monetary expansion has been very fast, reaching very large numbers. Why is it so very difficult and expensive for the real economy to obtain financing? I have always said that although the quantity of money and credit are high, the lending policy structure is extremely unreasonable. Data released by the People’s Bank indicates that the real estate industry receives 41 percent of all loans made. Real estate tycoons state that real estate contributes a lot to the Chinese economy. How much is its contribution? Although the real estate industry is considered a pillar industry in China, its 21 percent contribution takes away 41 percent of financing.

Structural Imbalance

Our main economic worry in China is, in fact, not whether the GDP rate is 6.7, 6.6 or 6.5 percent. Our concern is about structural imbalance, structural vulnerability, and structural risks.

Structural reform of the supply-side has been discussed during the most recent meeting of the Central Leading Group for Financial and Economic Affairs. The need to reduce ineffective supply, production capacity and inventory, and the need to de-leverage, were clearly pointed out. So, the problem with China’s economy is not about the growth rate of the consumer price index (CPI) or the GDP. These macro level data are merely averages that do not reveal the underlying structural problems.


In China the CPI does not reflect real inflation. The reason is simple. Key inflation indicators included in China’s CPI are mostly manufacturing products. The most important items that impact people’s lives are not included, or only a small number are included. For example, real estate, education, and health care expenses are not reflected in the CPI. How can this CPI truly reflect inflation?

Classical economics talks about the Misery Index, and in my opinion this is a more accurate reflection inflation. Today, a CPI level of 2.3 percent means deflation in China. But we cannot just mention a few industries when talking about inflation. We cannot only cover traditional manufacturing or industrial products. Let’s be fair! Whether it’s Chinese people in urban or rural areas, their biggest concern is not to buy an iPhone or a car, but to buy an apartment, send children to a good school, and obtain affordable medical services. These are people’s foremost needs these days.

When adding in these factors, real inflation is not 2.3 percent at all. If you tell the people on the street that there is no inflation in China, will they believe you? Food prices have gone up 7.4 percent, and this alone has had a great impact on low-income earners. I would say, without exaggeration, that China has a serious inflation issue.

Can we continue to maintain steady growth using massive monetary expansion and stimulus programs? Economics has its own rules. I am here to raise a warning flag.

This is an abridged translation of a lecture by Xiang Songzuo that was subsequently published on the aggregator website Consensus Net on May 18, 2016. Xiang is the chief economist at the Agricultural Bank of China.