Why China’s GDP Growth Rate Tells Us Nothing About Its Economy

China clocked in GDP growth of 6.9% in the first three quarters of 2017, and is set to end the year at 6.8%. But Peking University finance professor Michael Pettis believes that the figure is no indication of the actual state of the Chinese economy.

Unlike in the U.S., in China “it measures not output but input into the system, as local governments are encouraged to borrow however much is necessary in order to generate that GDP growth,” he argued, pointing out that the number is “astonishingly stable”, even more so than Switzerland’s.

Pettis spoke on panel on the Chinese economy at the Fortune Global Forum on Thursday, which briefly turned into a sparring session between Pettis and Tsinghua University economics professor David Li, both prominent economists and China specialists.

“Since we already know what the number will be in any given quarter, what we need to look at is how much debt it will take to get from the current growth rate to that level of GDP growth,” Pettis said.

There have been at least three dozen historical precedents of decade-long investment-driven growth miracles similar to China’s since World War One, but all of them had a “terrible adjustment”. “The factors that led to their adjustment, they are all there,” he said of the current state of the Chinese economy. “But the difference between China and the precedents is that we’ve not seen imbalances at such deep levels and debt at such high levels.”

Tsinghua’s Li counter-argued that any discussion on debt should take into account savings, as the source of debt is savings. “In Japan, they have high savings rate but their debt is 350% of GDP. In China, it is 250% of GDP.” He further suggested that China should increase its debt, as its 40% savings rate, which is two to three times the savings rate of the U.S., is currently too high.

Li chalked down China’s slowing growth rate in the last five years to the Beijing’s aggressive anti-corruption campaign, which frightened Chinese officials into holding off from investments. This prompted the Chinese central government to call for infrastructure spending, which once again raised official debt levels, he said.

On Pettis’ point on GDP, Li argued that the figure is not about corporate value-add, but economic activity. An accurate and stable growth rate is in policymakers’ interest, as it leads to social stability. He said: “In China, we are busy building roads, factories, buildings – that’s GDP growth. In no other countries [than in China] do you see so many roads, buildings and bridges being built.”

“GDP growth is 3% in the U.S., but you don’t see so many new buildings being built,” Li jibed, to laughter.