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Friday, August 16, 2013 8:45 PM

China Releases "Willfully Fraudulent" Inflation and GDP Data

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It's easy to make a case that GDP data everywhere is fraudulent because of the definition which includes government deficit spending, regardless of how ridiculous or useless the spending is. However, China takes the distortions to a level well beyond other countries.

Please consider Dodgy data may add $1 trillion to Chinese economy.

China may be exaggerating the size of its economy to the tune of $1 trillion by releasing "willfully fraudulent" inflation and GDP [gross domestic product] data, according to a study out this week.

Numbers from the world's second largest economy are treated with skepticism by some economists, but this latest report has attempted to quantify the scale of discrepancy.

"There is strong evidence indicating that the rate of real Chinese GDP growth, and ultimately total real GDP, may be significantly over stated," said Christopher Balding, associate professor at Peking University's HSBC Business School, and the report's author.

Through "significant and systematic irregularities", official estimates overstate China's true GDP by 8 to 12 percent, or $1 trillion, according to Balding.

In particular, the report focused on housing inflation data, which is one of the biggest items in the Consumer Price Index (CPI). China's booming economy has caused people to migrate from rural areas to the expanding cities, causing house prices to rocket in industrialised areas. Yet official statistics showed rural house prices increasing more than those in urban areas, said Balding.

According to the National Bureau of Statistics China, the price of private housing in rural areas grew at 1.67 percent per year on average, more than three times faster than prices in urban areas, which averaged 0.53 percent.

In addition, official statistics suggest the price of private housing in China rose by a very modest 8.14% over the 11-year period, despite a housing market boom and a quintupling in nominal GDP.

"The claim that the housing component of CPI grew by less than 10 percent between 2000 and 2011 is nothing less than comical," Professor Balding wrote.

Housing and the CPI

On many occasions I have commented on the distortions of housing and the CPI. The same holds true in the US. For example, please consider ...

As in the US, China does not directly include housing prices in the CPI. I believe housing prices should be in the CPI.

Ignoring asset bubbles is ridiculous, just as the US proved.

Regardless, it is preposterous to presume "the price of private housing in rural areas grew at 1.67 percent per year on average, more than three times faster than prices in urban areas, which averaged 0.53 percent."

Moreover, and unlike other countries, China includes money that is allocated and not even spent. Chinese electricity usage reports are questionable to say the least.

Is Chinese GDP distorted? Of course. GDP everywhere is so distorted as to be useless, but China is at the head of the list.

Mike "Mish" Shedlock

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