Fake it until you make it

China GDP: China’s GDP figures might show that the world’s third-largest economy is coming out of its funk. But few economists will take Thursday’s report at face value. While their caution is wise, the Middle Kingdom probably is recovering – tentatively.

The country’s leadership has set a target of 8 per cent growth for 2009. Most economists believe the magic number will be hit, as do 88 per cent of investors in China, according to an ING survey. Reported growth in the first quarter was 6.1 per cent, and a 7.1 per cent “print” is expected for the second quarter, followed by above-trend growth in the second half.

But the GDP growth rate in China is too important a number politically to be reliable. From the bottom to the top of the data chain, everyone has a reason to report numbers that look politically correct. As economist Charles Goodhart pointed out, when leaders turn a measurement into a target, it stops being a good measurement.

Still, simpler indicators also point to recovery. Car sales rose 37 per cent in June. Electricity consumption rose 3.7 per cent, reversing May’s decline. Production of steel, diesel, speciality chemicals and even fridges are all back at pre-downturn levels. Exports are still falling, but a slower fall in imports suggests China's domestic consumption is recovering faster than that of its trade partners.

None of these indicators is perfect. Sales can rise because prices are cut to unsustainably low levels. Industrial production counts what's made, not what's sold. And rising imports could be a sign of firms buying materials to make products that as yet have no buyers. Either way, financial aid has certainly helped make this recovery, if there is one, look healthier. The central bank has pumped three times more money into the economy so far this year than in the same period last year. A record rise in the country’s foreign exchange holdings in June suggests speculative foreign money is now adding to the wall of liquidity.

Whatever the GDP figures show, China remains an unbalanced economy. Real private consumption is immature. Only time can change that. The export engine remains dormant. Only a recovery in the US and Europe can get it moving. Over those things, Beijing has next to no control.