Veracity of Chinese Output data and Renminbi Valuation

The reliability of Chinese official statistics is the topic of a recent Economist article (An aberrant abacus, May 1, 2008). Given its sheer size and diversity, it is understandably difficult to compile China’s Gross Domestic Product (GDP) figures. The contentious issue is whether the Chinese government deliberately overstates GDP figures. For instance, some commentators accused the Chinese government of deliberately overstating GDP figures in the 1990s, understating GDP growth in the early new millennium, and, more recently, smoothing the 2008 first-quarter GDP figure to mitigate the effect of severe snow storms and softer net exports.

There is circumstantial evidence that China is improving the accuracy its office GDP figures. For instance, the actual size of the Chinese economy was under scrutiny again on December 20, 2005 when the Chinese National Bureau of Statistics announced a 16.8% upward revision of the China’s GDP in 2004 due to the previous under-estimation of the services sector. In April this year, the Bureau revised up the 2006 and 2007 growth rates  by 0.5%. While the effort of offering more accurate GDP figures is welcomed, the revision hardly resolve all the doubts about the reliability of official data.

A new twist comes when, with much less fanfare, China became a much smaller economic giant as its economy shrank by about 40% in mid-2007 by stealth. It happened when the most recently collected price data by the World Bank group showed that China’s purchasing-power-parity-based GDP is much smaller that what it thought to be. We are not in a position to dig deep into the issue here. One thing for sure is that China is not alone in the quagmire of its GDP uncertainty. The accuracy and veracity of Chinese GDP figures remain a point of strenuous debate in the foreseeable future.[i]

Menzie in a recent BLOG noted that a wide swing in the Chinese GDP figures has substantially implications for evaluating the equilibrium/fair Renminbi exchange rate. Specifically, he perceptibly pointed out that the degree of Renminbi misalignment reported in our joint work Cheung-Chinn-Fujii will be substantially reduced. With the most recently released World Development Indicators, our co-author Eiji re-estimated the renminbi exchange rate misalignment. The two figures below compare the results from the original study and those from the latest dataset. The first figure in fact is used in Menzie’s blog and indicates the possible reduction in China’s 2006 misalignment when the Chinese 2006 new PPP-based output figure is used. The second figure is based on all the new PPP-based output data. It is quite obvious that, with the updated PPP-based output data, the Chinese real exchange rate given by the relative price level was undervalued in the last 10 years or so but the degree of undervaluation is relatively mild; especially compared with the one implied by the old data. We expect to have all the results in the original paper updated shortly.

  At this stage, it is worthwhile repeating a few points we made in Cheung-Chinn-Fujii. First, the data revision reinforces our assessment that, once sampling uncertainty and serial correlation are accounted for, there is little statistical evidence that the renminbi is undervalued. Second, the evidence does not prove renminbi is not undervalued, either. Indeed, the result should not be surprising because it is known that economists do not have a good model explaining exchange rate behavior and, thus, it is extremely difficult to pin down what the “equilibrium” value of the currency might be. Third, “the finding of a highly uncertain equilibrium real exchange rate buttresses the case for a prudent, cautious exchange rate policy that avoids abrupt changes in the Chinese economy.”