Right up until Beijing’s move to devalue the yuan temporarily shifted the market’s focus away from Chinese economic data in favor of the daily RMB fixings, Western investors watched closely every evening for any signs of just how “hard” China’s landing is ultimately shaping up to be. 

Of course the data point par excellence when it comes to gauging the degree to which the Chinese economic engine is sputtering is the all-important (and all-fabricated) GDP print, which has a way of conforming to Beijing’s 7% “target.”

The interesting thing about Chinese GDP data is not that it’s hopelessly overstated. Everyone knows that. There’s no telling what the “real” number is and the best way to get a read on what’s actually going on is probably to look at the so-called Li Keqiang index which tracks the variables the Chinese premier thinks are the best way to approximate output, but then again, who knows.

What’s interesting is the degree to which China’s GDP prints may be overstated as a result of something other than outright manipulation and fabrication: namely, the country’s inability to accurately measure the deflator. 

We’ve discussed Beijing’s deficient deflator math on a number of occasions. Here, in a nutshell, is the “problem”:

Effectively, the assertion is that China’s deflator simply tracks producer prices, and thus when import prices slide, the deflator understates domestic inflation and therefore overstates real GDP. In the simplest possible terms: when commodity prices are falling, China (and other EMs) may be routinely overstating GDP growth. Here’s an excerpt from FT:

In the first quarter of the year, China’s deflator turned negative for the second time since 2000, coming in at -1.1 per cent. In comparison, consumer price inflation was +1.2 per cent. This means its inflation gap has jumped to 2.3 percentage points, even as it has fallen sharply in the likes of the US, as the chart shows. If the deflator is, as a result, understated, then real GDP growth is overstated by the same amount.

“A reasonable guess might be that true inflation was 1-2 percentage points higher than the deflator shows. In that case, real GDP growth in Q1 would have been 5-6 per cent [rather than 7 per cent],” said Cang Liu, China economist at Capital Economics, who added that the lower rate was closer to Capital Economics’ own estimate, based on activity data, of 4.9 per cent.