Comment 40: What is the actual inflation rate of China in recent years? (Feb. 20, 2007)

The growth rate of China's real GDP is near 10% in recent years, whereas Consumer Price Index (CPI) is reported as growing at a scant rate of a few percentage points a year. Many observers and economists are awed by such a performance and are casually painting a picture of infallibility of China's economy, but without carefully analyzing the consistence of the statistical data as any serious researcher should do. In this comment we present such an analysis to cast serious doubts about the claim of very low inflation rate in China in recent years. This result seems to make us understand why Chinese government is so worried about the torrid growth rate of its economy and is pushing out measure after measures trying to cool its economy down.

GDP stands for Gross Domestic Products, and is a tabulation of the total goods and services produced in a society for a set period, like within a quarter or a year. There are two kinds of GDP, the nominal GDP and the real GDP. When the total amount, in monetary units, of goods and services produced is tabulated, it becomes the nominal GDP. However, merely looking at the growth rate of nominal GDP can be misleading. In a high inflation environment, the price of an item produced this year will be substantially higher than the price of the same item produced last year. When tabulated into the nominal GDP, its growth rate will apparently be pushed up strongly by the high inflation rate. In order to grasp the real picture of the economy, the nominal GDP needs to be adjusted for inflation, and the result is called the real GDP. GDP compilation does not use CPI to adjust inflation, but uses its own inflation measure called GDP deflator. The GDP deflator is thus another measure for inflation. If one wants to discuss the growth rate of real GDP along side with inflation rate, he must use the GDP deflator, not CPI, if two differs widely, for the sake of logical consistency. Then what is the GDP deflator for the Chinese economy? Unfortunately it is not published explicitly by Chinese government on the website of National Bureau of Statistics of China, but are easily calculable from other GDP data published on the website. We will present the result of such a calculation here.

Let us denote a GDP related data, say the nominal GDP, at year y and quarter x as NominalGDP(y, Qx), and so on. By definition we can write

          NominalGDP(y, Qx) = GDPdeflator(y, Qx) · RealGDP(y, Qx).

Similarly we can write the relation for the year y-1 and quarter Qx as

          NominalGDP(y-1, Qx) = GDPdeflator(y-1, Qx) · RealGDP(y-1, Qx).

Deviding both sides of the first equation by the corresponding sides of the second equation, and rearranging the terms of the resulting equation, we get

          {GDPdeflator(y, Qx)/GDPdeflator(y-1, Qx)} = { NominalGDP(y, Qx) /NominalGDP(y-1, Qx)} / {RealGDP(y, Qx) /RealGDP(y-1, Qx)}.

Let us denote the rate of growth (in fractional expression) of the GDP deflator at year y and quarter x as g(y, Qx), and the growth rate of the real GDP as r(y, Qx) respectively. By definition we have GDPdeflator(y, Qx) / GDPdeflator(y-1, Qx) = 1 + g(y, Qx) and RealGDP(y, Qx)/ RealGDP(y-1, Qx) = 1 + r(y, Qx). Substituting these two relations into the above equation, we get the relation

          1 + g(y, Qx) = {NominalGDP(y, Qx) / NominalGDP(y-1, Qx)} / {1 + r(y, Qx)}.

The final relation implies that if we know the growth rate of real GDP, r(y, Qx), the nominal GDP at year y and quarter Qx, and the nominal GDP at year y-1 and quarter Qx, then we can calculate the growth rate of the GDP deflator, g(y, Qx) at year y and quarter x. Fortunately in each GDP report from National Bureau of Statistics of China, the nominal GDP and the growth rate of the real GDP are always given, and thus allow the computation of the growth rate of the GDP deflator for many periods.

Before jumping into the result of the calculation of GDP deflators, let us look into the available GDP data first. In the following table, data from National Bureau of Statistics of China are written in black letters. To supplement the missing data from the bureau, data from a data base called allcountries.org are written in red; the latter data base gets the data from data bases kept by CIA of USA. In the table GDP data at Qx means the accumulated sum from Q1 to Qx in the calender year, so the data at Q4 is actually the GDP for the whole calender year. Similarly the growth rate of the real GDP in the quarter Qx is the average growth rate from quarter Q1 to quarter Qx. We can see the black and the red numbers are consistent at the overlapping period of Q4 of 2004.

Year Nominal GDP in billion Yuans Real GDP % change from same period prior year
Q1 Q2 Q3 Q4 Q4 Q1 Q2 Q3 Q4
2006 4,331 9,144 14,148 - - - - - - +10.2 +10.9 +10.7 - - -
2005 3,132 6,742 10,628 18,232 - - - +9.5 +9.5 +9.4 +9.9
2004 2,713 5,879 9,314 13,652 13,688 +9.8 +9.7 +9.5 +9.5
2003 2,356 5,005 7,911 - - - 11,739 +9.9 +8.2 +8.5 - - -
2002 2,102 4,554 7,168 - - - 10,517 +7.6 +7.8 +7.9 - - -
2001 - - - - - - - - - - - - 9,731 - - - - - - - - - - - -
2000 - - - - - - - - - - - - 8,947 - - - - - - - - - - - -
1999 - - - - - - - - - - - - 8,207 - - - - - - - - - - - -
1998 - - - - - - - - - - - - 7,835 - - - - - - - - - - - -
Black numbers are obtained from the website of National Bureau of Statisttics of China and the red numbers are obtained from the website of allcountries.org, the data on which are derived from CIA's data bases. Q1,..., Q4 refer to Quarter 1, ... ,4. The data under those categories are cumulative. For example, a GDP number under Q4 is the sum of Q1 to Q4, thus equivalent to the number of the whole year. A number under Q4 of the category of Real GDP % change is the % change of the whole year.


The calculated results of the growth rate (expressed in %) of GDP deflators are shown in the following table along with CPI data provided by the data bases.

Year GDPdeflator % change from prior year CPI % change from prior year
Q1 Q2 Q3 Q4 Jan. to Nov. Jan. to Dec.
2006 +25.5 +22.3 +20.3 - - - +1.3 +1.8
2005 +5.4 +4.7 +4.3 +21.5 +1.8 +1.8
2004 +4.9 +7.1 +7.5 - - - +4.0 +3.9
2003 +2.0 +1.6 +1.7 - - - +1.0 +1.2
2002 - - - - - - - - - - - - -0.8 -0.8
2001 - - - - - - - - - - - - - - - +0.7
2000 - - - - - - - - - - - - - - - +0.4
1999 - - - - - - - - - - - - - - - -1.4
1998 - - - - - - - - - - - - - - - -0.8
1997 - - - - - - - - - - - - - - - +2.8
1996 - - - - - - - - - - - - - - - +8.3
1995 - - - - - - - - - - - - - - - +17.1
1994 - - - - - - - - - - - - - - - +24.1
Numbers under GDPdeflator are derived from the data on the website of National Bureau of Statisttics of China. The black numbers under CPI are obtained from the web site of National Bureau of Statistics of China, and the red numbers are obtained from the website of allcountries.org, the data on which are derived from CIA's data bases. Q1,..., Q4 refer to Quarter 1, ... ,4. The data under those categories are cumulative. For example, a GDPdeflator % change number under Q4 is the average of Q1 to Q4, thus equivalent to the number of the whole year.

From the results of the growth rates of GPI deflator in the second table, we can see that GDP deflators until the third quarter of 2005 are not terribly different from the growth rate of CPI. It is from the fourth quarter of 2005, two inflation measures have diverged dramatically. If one deems that CPI is more reliable than GDP deflators since the fourth quarter of 2005, then we must discredit those reports that China's real GDP has grown about 10% a year in 2004 and 2005. If that is the case we must note the unique nature of China's inflation rate measured by CPI that has fallen on the face of rapidly rising oil price since 2005. This means that China should be worried about deflation rather than inflation and as the consquence Chinese government's recent moves to tighten the monetary condition become completely misguided. On the other hand if we dismiss CPI as a pure fantasy, then we we must explain why the growth rate of GDP deflator suddenly flares up from the fourth quarter of 2005. One answer is in the rise of oil price since 2005. Chinese government controls the price of oil related products at consumer level. It had tried hard to keep the domestic price of oil suppressed through subsidies. However, around the fourth quarter of 2005 it has allowed the domestic price of oil to go up by a certain amount, thus triggering a sudden run up of inflation rate. Another factor is the expiration of international textile quota at the beginning of 2006. This has spurred substantially increased production of textiles in China since the fourth quarter of 2005. It is important to see the GDP deflator data in the fourth quarter of 2006 and the first quarter of 2007. If the growth rates of GDP deflator calm down to below 10%, reflecting the down turn of oil price, then Chinese government only needs to continue its cautious tightening steps of the monetary condition. If the growth rates of GDP deflator does not calm down soon, Chinese government probably needs to take much more aggressive measures to slow down the economic growth in order to prevent the coming hyper inflation.