On July 15th, the National Bureau of Statistics of China unveiled its gross domestic product (GDP) figures for the first half of 2024. The total GDP stood at a staggering 61.68 trillion yuan, reflecting an actual growth rate of 5%. This news captured the attention of economists, investors, and policymakers alike as they seek to gauge the pulse of the world's second-largest economy amid shifting global dynamics.

To provide context, in the first quarter of 2024, China reported a real GDP growth rate of 5.3%. When combining this with the second-quarter data, the average growth rate slipped to 5%, indicating that the economic expansion in the second quarter fell short of the annual growth target of 5% set at the beginning of the yearThis situation raised eyebrows among analysts keen on deciphering the health of the Chinese economy.

Indeed, the figures neatly corroborate this analysis

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The National Bureau of Statistics disclosed that the GDP growth rate for the second quarter was 4.7%. This marks a decrease of 0.6 percentage points compared to the first quarter's robust 5.3% growth, pulling the overall performance for the first half of the year down to precisely 5%.

The reasons for this decline can be attributed to the increasingly complex and challenging external environment, along with the evident structural adjustments within China's economyThe reality is that achieving a 5% growth amid such conditions is no small feat, underlining the resilience of the Chinese economy.

Gone are the days when policymakers primarily focused on sheer volume and expansionIn a bid to stimulate growth, one could simply relax purchase restrictions in first-tier cities or inflate the property market, and thereby drive GDP figures upward without undergoing any substantial transformation in the economic structure

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However, the current focus is squarely on a higher quality of development rather than merely pursuing GDP figures.

Contrastingly, when we analyze the GDP in dollar terms, it painted a somewhat sobering pictureThe GDP for the first half of this year, when calculated in USD, stood at approximately $8.68 trillion, reflecting a mere 1.4% increase over the $8.56 trillion recorded in the same period last yearThis figure is alarmingly below one-third of the reported 5% growth rate, raising critical questions about the authenticity and reliability of the data being presented.

One key aspect to understand is the difference between nominal growth and real growth.

If one closely analyzes the total GDP for the first half of this year compared to last year, it does not appear to align with a growth rate of 5%. The GDP amount for January to June 2023 was recorded at 59.27 trillion yuan, while for the same period in 2024, it sits at 61.68 trillion yuan

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A simple calculation yields a growth ratio of 4.07%, underscoring the perplexity around the National Bureau of Statistics' reported 5%. Is there a miscalculation at play?

Not necessarilyThe figure of 5% is referred to as the real growth rate, derived from the GDP amounts adjusted for price fluctuations—indicating actual growth in terms of value producedConversely, the 4.07% growth, calculated from the two periods of GDP totals, is nominal and includes the effects of inflation, hence the disparity.

When prices are on the rise, the nominal growth exceeds the real growth rate; however, the opposite holds true during deflationary periodsThe current trend, with nominal growth lagging behind, suggests a compression in overall price levels, which is affirmed by another piece of data provided by the National Bureau of Statistics.

To quantify production changes, the Producer Price Index (PPI) is instrumental

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According to recent data, this year's PPI figured 2.1% lower than the same time last yearThis indicates that the nominal GDP growth was constrained to just 4.07%, almost 1 percentage point off the reported real growth figure by the Bureau.

Another contributing factor to these discrepancies lies in the depreciation of the Chinese yuan against the dollar, leading to apparent "losses" when converting values for international comparison.

The decline in price levels, in conjunction with the exchange rate fluctuations, has significantly influenced nominal GDPExamining the GDP totals for the first halves of 2024 and 2023 gives us a clearer picture: 61.68 trillion yuan and 59.27 trillion yuan, respectively.

The average exchange rates during these timeframes were 7.105 and 6.925. Thus, the GDP figures, when translated into USD, reveal the 2024 first half GDP at approximately $8.68 trillion and the 2023 figure at $8.56 trillion, corresponding to a lackluster growth rate of just 1.4%.

It becomes evident that currency fluctuations wield a more significant impact on GDP figures than price level shifts.

But the question still looms: which figure is the most reliable indicator of economic growth? The 5%, 4.07%, or 1.4%?

Firstly, the difference between 5% and 4.07% rests on whether inflation is considered

It is worthwhile to note that practically every country publishes GDP growth rates that exclude price fluctuation effects, including China, the United States, Japan, and the European Union.

Nominal growth rates are vulnerable to inflationary pressures, which can obscure an accurate view of economic progressIf nations were to rely solely on nominal growth as a barometer of economic health, it would create a paradoxical scenario where nations needn't strategize their economic development paths; they could merely ignite their respective "money printing presses," fueling inflation and inflating nominal figures equivalently.

Such reasoning is evidently flawed; otherwise, the Federal Reserve wouldn't engage in aggressive interest rate hikes to stabilize inflation.

Secondly, while exchange rates are crucial, their application must be judicious.

GDP, an acronym for Gross Domestic Product, essentially measures the actual wealth created by all economic actors within a specified timeframe

It characterizes real wealth, attention being on goods and services rather than mere monetary valuesCurrency measurement serves merely as a convenience to ascertain the degree of wealth creation.

With this understanding, the discussion turns to exchange rates and their effects on GDPThe exchange rate indicates the value of one currency relative to another, swayed by various factors such as supply and demand of currency, prevailing conditions in international financial markets, and investment requirementsThese fluctuations can distort the value of real wealth produced.

For instance, if a bottle of mineral water is produced this year without any variables changing in its production process, but the currency exchange rate depreciates, resulting in a lower dollar value, the water remains the same product; its intrinsic worth hasn't changedConversely, if the exchange rate appreciates, translating into a higher dollar value, it doesn't imply an increase in wealth generation from that product.

Therefore, deriving growth rates by converting nominal GDP into dollars leaves room for distortion due to irrelevant factors and is less effective for measuring the actual value added in wealth