China’s official GDP figures have long been a subject of skepticism, and now a prominent Chinese economist has openly voiced doubts about their accuracy.
Gao Shanwen, chief economist at SDIC Securities and a former adviser to Chinese policymakers, remarked at an event hosted by the Peterson Institute for International Economics in Washington, D.C., that "we do not know the true number of China's real growth figure and maybe some other numbers."
Gao suggested that the official GDP growth rates reported by China, especially following the pandemic, may be overstated. He estimated that China’s GDP growth likely averaged about 2% in the past two to three years, despite official figures suggesting a growth rate close to 5%.
"If my speculation is correct," Gao said, "it might be more reasonable to expect a growth rate between 3% and 4% in the next three to five years." However, he added, "the official number will always be around 5%."
This divergence between official and actual growth estimates raises questions for wealth advisors and registered investment advisors (RIAs) managing client portfolios with exposure to Chinese markets. China reported 5.2% GDP growth for 2023 and set a growth target of “around 5%” for 2024, but analysts have cautioned that achieving this goal is ambitious given the prevailing economic conditions.
Discrepancies in China's Economic Reporting
Skepticism about China’s GDP reporting is not new. Analysts have long noted that the figures may be "systematically inflated" due to methodological issues rather than deliberate manipulation. For RIAs, this discrepancy underscores the importance of seeking alternative data sources and conducting rigorous due diligence when advising clients on investments tied to China’s economic outlook.
Consumption Struggles and the Youth Crisis
Gao also shed light on troubling trends among China’s youth, calling them “lifeless” in a recent speech that sparked controversy and censorship in China. He observed that provinces with younger populations show slower consumption growth, a stark reflection of economic pressures faced by the younger generation.
“China is now full of vibrant old people, lifeless young people, and middle-aged people in despair,” Gao noted. He highlighted a cultural shift where younger individuals are "tightening their belts and eating noodles with the lights off," signaling an era of extreme frugality. This phenomenon poses challenges for advisors who may rely on projections of robust consumer demand in emerging markets like China.
China’s economy is grappling with significant headwinds, including a real estate crisis, deflation, and record-high youth unemployment. For RIAs and wealth advisors, these issues highlight the need for caution when evaluating Chinese equities and bonds. Consumer confidence remains weak, and many Chinese are opting for cheaper goods, reflecting a reluctance to spend amid economic uncertainty.
Economic Recovery Stalls Post-Pandemic
China’s economy has struggled to regain momentum since the lifting of pandemic restrictions. Although exports have provided a temporary cushion, weak domestic demand continues to drag on overall growth. Recognizing the economic malaise, top Chinese officials recently announced measures to stimulate consumption and stabilize growth.
At a two-day Central Economic Work Conference led by President Xi Jinping, policymakers pledged to loosen monetary policy, expand the budget deficit, and increase debt issuance to spur consumption and economic recovery. However, analysts and investors were unimpressed by the announcements, which lacked detailed implementation strategies.
China’s major stock indices reacted negatively to the news. The CSI300 Index dropped 1.8% at midday, while the Hang Seng Index in Hong Kong fell 1.7%. Nomura economists pointed out that the ongoing property crisis, fiscal challenges, and escalating tensions with the U.S. have plunged China into an atypical economic downturn that may require more than just a traditional stimulus package to reverse.
Implications for RIAs and Wealth Management For wealth advisors and RIAs, the implications of China’s economic slowdown are profound. Portfolio diversification strategies involving China must account for these systemic risks, including inflated growth data and structural weaknesses. Advisors should emphasize alternative investment strategies that minimize overexposure to Chinese markets.
In light of Gao’s remarks and broader economic trends, RIAs may consider focusing on sectors less dependent on domestic consumption or real estate, such as technology and export-driven industries. Additionally, the importance of monitoring geopolitical tensions between China and the U.S. cannot be overstated, as these conflicts may further impact investor sentiment and market performance.
Looking Ahead: Strategic Adjustments
Gao’s projection of a more realistic 3%-4% GDP growth rate in the coming years aligns with a cautious outlook for China’s economy. While the official figures may continue to suggest stronger growth, wealth advisors should prioritize independent research and adopt a conservative approach to evaluating opportunities in China.
Investors should also be wary of short-term stimulus measures that lack clarity or fail to address structural challenges in the Chinese economy. As the country’s leadership grapples with deflation, unemployment, and declining consumer confidence, it remains to be seen whether meaningful reforms will emerge to support sustainable growth.
For now, wealth advisors must balance the allure of China’s vast market potential with the risks posed by economic uncertainty and opaque reporting practices. Robust risk management and diversified investment strategies will be key to navigating these challenges while safeguarding client portfolios.
