China’s Emerging Market May Not Last

China accounts for approximately 27 percent of the MSCI Emerging Markets Index. That hugely overshadows runner-up South Korea, who accounts for about 13%. In fact, China’s 27 percent comes in 9% higher than their 18% from just a decade ago. Even more astounding, China’s EME came in at 5th place just 10 years ago, when it was overshadowed by Brazil, South Korea, Taiwan and Russia.

China proudly boasts the world’s second-largest economy with a GDP of roughly $13 trillion – three times larger than Japan – the world’s third largest economy. Though China’s growth-spurt is largely an anomaly, and they are set to surpass the US in booming economics roughly by the year 2022, there’s still some things we need to discuss. So, even if the numbers on China aren’t completely reliable, it’s highly doubtful that China, at the very least, won’t turn out to be one of the world’s largest economic juggernauts.

But there are some claiming that China will lose its “emerging market” status as growth in the country continues to decline.

Alternative Growth reports show that growth in China may in fact be lower than is reported at the national level. For instance, Endo Economics and The Conference Board, financial institutions based in London and New York respectively, find lower growth rates in China across the board on a consistent basis.

Professor of finance at Guanghua School of Management at Peking University in Beijing, Michael Pettis, states, “I think that on a comparable basis [GDP] wouldn’t be much above 3-3.5%. The real growth in China’s underlying economy, in other words, is probably half the posted GDP growth number or less.” So what is the reason for the discrepancy between these numbers? Well, for one, it appears the numbers in China are possibly skewed. China’s growth rate is slowing, for sure, but the official statistics overstate real growth.

In 2017, growth was at 6.9%, a figure that is essentially meaningless when one takes into consideration the amount of governmental control that goes into the production of these numbers. This phenomena is known as ‘industry value’, and it’s one way the Chinese government can manipulate their GDP calculations. Half of these industries – utilities, agriculture, telecommunications, social services, water conservancy, education, culture, and government agency sectors – are all controlled and dominated by the state. The result? The government can choose from a variety of industries of which to add growth to, and thus manipulate their GDP for perceived economic strength. Essentially, using this method of GDP manipulation allows a government to skew the numbers and aesthetically overcompensate for the demand/supply deficit that occurs when an economy is losing its upward momentum.

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