China's Growth May Not Be So Spectacular

At face value, China's latest GDP numbers look impressive. Official figures released last week show that the world's fastest-growing major economy expanded 6.8 percent last quarter and 9 percent during all of 2008. Not double digits, but hefty in the context of global recession.

But is that the true picture? China tabulates growth figures on a year-on-year basis, meaning that last quarter's output was 6.8 percent larger than over the final quarter of 2007. Yet in the world's two largest economies, the United States and Japan, growth is tallied sequentially by comparing one quarter's growth with that of the previous quarter. And by that measure, China's numbers fall hard. In sequential terms, Goldman Sachs calculates that China's economy expanded by just 2.6 percent in the last three months of 2008, and according to Morgan Stanley's math it actually shrank by 0.5 percent.

The competing methodologies matter very much going forward. Beijing has pledged to spend some $586 billion to prevent GDP growth from falling below 8 percent in 2009, but because "sequential [data] is closer to a real-time gauge of what is likely to happen in the future," as Stephen Roach, the head of Morgan Stanley Asia, puts it, "it ended last year in a big hole relative to that target." China's has passed a critical inflection point on its path to a hard landing—even if the official statistics don't say so yet.