Beware of China's overly optimistic economic growth projections!

Lester Thurow, MIT's professor of economics has written an article for the NYtimes warning analysts and investors to take the Chinese government's growth projections with a pinch of salt "A Chinese Century? Maybe it's the next one," - August 19, 2007 (link here)

Quote from article:

"Economic growth rates can be inferred from electricity consumption. In every country in the world, electricity use has generally grown faster than the G.D.P. Electricity is necessary for nearly all productive activities, and because of inefficiencies, consumption of electricity has generally outstripped economic growth. Rising energy costs have resulted in more efficient use of electricity, but especially in the developing world, economic growth has still generally lagged growth in electricity.

But if China’s official numbers are to be believed, there are provinces in China where the G.D.P. has been growing faster than energy use. That is unlikely, since the central government’s statistics also say that energy use per unit of G.D.P. is going up — not down, as claimed in provincial G.D.P. statistics.

Among the world’s 12 most rapidly growing economies over the last 10 years, the G.D.P. has grown only 45 percent as fast as electricity consumption. In the early 1970s, Japan was shutting down its electricity-guzzling aluminum industry. During this period, the G.D.P. grew 60 percent as fast as electricity consumption, the highest recorded level among industrialized nations.

Using those numbers as a guide, if we consider China’s actual electrical use, which is relatively easy to measure, and do a little math, we come up with this estimate: The G.D.P. in China has been growing somewhere between 4.5 percent (using the average for a rapidly growing country) to 6 percent a year (using the highest rate for Japan), not at the 10 percent rate claimed in official statistics."

Several lessons to be learnt here:
1. Whack 4.5% - 6% into calculating Terminal value growth projections of Chinese companies rather than 10% (or any higher Economic growth rate as a proxy for a company's growth!)

2. A method to figure out economic growth projections for a company in an emerging economy. Use Growth rates in Electric Consumption to estimate the economic growth rather than use the Government's stated economic growth rate.