Is China's Economy Losing Energy? or is China not Reporting Inflation Correctly?

IS CHINA’S economy underheating? Not long ago, many people would have scoffed at the suggestion. The country is known for searing property prices, hot-money inflows and the steam escaping from its financial furnaces. The stock of outstanding credit, broadly defined, climbed to over 180% of GDP at the end of 2013, according to the central bank, and over 215%, according to an even broader measure by Fitch, a ratings agency.

But house prices are slowing, exports are weak and shadow banking is losing ground to traditional lending. Forecasters expected industrial output to grow by 9.5% in the first two months of 2014, compared with a year earlier; it grew by only 8.6%.

Moreover, evidence of excess has long been absent from the traditional measure of economic overheating: inflation. New figures suggest that consumer prices rose by only 2% in the year to February, well below China’s average inflation of over 3% in the past decade. The prices paid to producers fell, again.

One way to reconcile the inflation number with other signs of excess is to disbelieve it. China’s critics routinely argue that inflation is higher than the government’s statisticians claim. But although it is easy to say the official figures are bad, it is difficult to quantify how bad.

That is the tricky task that Emi Nakamura, Jón Steinsson and Miao Liu of Columbia University set themselves in a recent study. They start with an economic law first observed by a 19th-century statistician, Ernst Engel: richer households spend a smaller share of their income on food. Thus as a household becomes richer over time, its spending pattern should match that of households who were equally rich a year or two before.

But in China, they discovered something different. They compared urban households in 2006 with households that were, according to the official figures, equally rich in 2008. They discovered that the later households were devoting 3-4% more of their budgets to food. Perhaps they were not quite as rich as their 2006 counterparts, after all.

link.