Originally published in TheEdge Malaysia, 18th – 24th February 2019 edition.

The Chinese economy is not about to implode despite the alarming media headlines of late. Things are not that bad … but they are definitely not that good either.

This is not about the eye of the beholder. If key metrics keep coming in below expectations, if bond defaults keep going up, if household debts keep rising faster than incomes, if China’s own leaders warn of seriously tough times ahead, then economic risk is no longer a matter of perspective.

Consider that most deceptive growth metric: GDP. Chinese growth came in at 6.6% in 2018 – the weakest in 28 years.

On the surface, this may not seem all that bad. Even at this slower pace, the economy still expanded by some US$1.2 trillion, more than the entire 2017 output of Indonesia.

But divide this among 1.39 billion people and the picture definitely looks less rosy. The International Monetary Fund puts China’s 2017 per capita GDP at US$8,643 – behind Kazakhstan, Malaysia and Turkey.

The level of growth that rich developed nations can only dream of is the minimum needed for China to maintain even modest living standards. World Bank data shows that 40% of the population or nearly 500 million Chinese people live on less than US$5.50 a day. Of these, some 30 million of them live below the national poverty line of US$1.90 a day.

GDP is also a deceptive metric because it measures raw economic activity, not necessarily progress. An earthquake demolishes a school. Another one is built in its place. GDP goes up but the community is not better off.

Then there is the question of how large a grain of salt one should take when it comes to Chinese numbers. Cooking the books is a well known pastime. The provinces of Liaoning and Inner Mongolia are among those caught out last year for substantially and repeatedly inflating their GDP numbers. And it is telling that aggregate provincial output in most years typically exceeds the national total by a wide margin.

Some of China’s own top economists have started publicly challenging official numbers. Dropping a bombshell on the research community at the end of the year was Prof. Xiang Songzuo at the Renmin University School of Finance and former chief economist of the Agricultural Bank of China.

He said calculations published in “an internal report” show that China’s GDP growth might only have increased by 1.67% last year or might even have been negative. This is not the usual rumour mill. Top government economists are not in the business of scaremongering. And, importantly, there has not been an official refutation of his claims to date.

Then there is the consumption argument. China’s economic model is changing with consumption increasingly driving growth. That surely must provide cushioning from the trade war and must be positive for the long term outlook.

The danger is in mistaking the cart for the horse.

Consumption did not take off in previous years because Chinese people had very low disposable incomes. You can’t spend what you don’t have. Entry to the World Trade Organisation turbocharged the economy. Jobs multiplied. Incomes rose. Consumer spending followed.

The Chinese consumer was suddenly news. Skewing outside perceptions of Chinese consumption power are the many stories of its big spenders splashing out from Beijing to New York to Paris keeping luxury brands alive. And the big Chinese cities display an affluence in keeping with the assumption that the Chinese consumer has indeed “arrived”. Shanghai boasts a per capita GDP of $18,749 – more than double the national average. It ranks just after Greece and is only six notches below Taiwan.

But the other nine-tenths of the population do not have such deep pockets. Official data for the first three quarters of 2018 put China’s per capita disposable income at US$8.3 a day – averaging US$11.8 a day for urban dwellers and US$4.22 for rural residents.

There is not much incentive for spending this very modest income if jobs are seen to be at risk, the stock markets are crashing, and property prices threatening to go into reverse. As it is, Chinese households have been borrowing to finance purchases, mostly through mortgages. Between 2007 and 2018, Chinese household debt rose nine-fold against a threefold increase in nominal household incomes.

Today’s income earners also face much heavier family burdens. A married couple is likely to have to support at least five other people in the so-called 4:2:1 structure: four parents, two adults and one child. In some families, the grandparents are still alive and need to be cared for. As the nation ages, the dependency ratio will only go up.

And forget retail numbers as an indicator of demand. The 2017 increase in retail sales was not matched by a similar increase in output for consumer products over the period. For both numbers to be true, there would have to be some heroic de-stocking or wild price increases.

Consumption as an engine of growth is tied to a nation’s ability to generate high-value exports and efficient investment. Its mere dominance in output is not significant on its own. In 1962, when China was closed off to the outside world and per capita GDP was only US$76 and growth rate from the previous year was negative, private consumption accounted for an all-time high of 71.3% of economic output.

Past performance is no guarantee of future results. As we all know, having money to spend last year does not guarantee there is money to spend this year or that we would be comfortable spending it.

The Chinese economy is no more likely to implode than it is to make a miraculous recovery to headline-grabbing growth over the next few years. A modest expansion of between 6.0% – 6.4% a year on average until the end of the decade is the most likely scenario unless the dispute with the United States takes a major turn for the worse. This is China’s new normal.

Increasingly, there is global consensus that China is facing a significant slowdown. But when US president Trump starts tweeting about the dire straits of the Chinese economy, the knee-cap response in many otherwise level-headed circles is to prove him wrong.

Beauty may be in the eye of the beholder but economic performance is all about verifiable data.