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Shaking things up in China

During President Obama’s recent visit to China, even getting off the plane involved political upheaval: The New York Times described the mood as “tense” when disagreements between Chinese and U.S. officials compelled the president to use an alternative stairway to deplane Air Force One.

Chinese economic policy has also been tense for some time now, independent of their ability or willingness to accommodate a foreign 747. The graph above plots the Economic Policy Uncertainty Index from Baker, Bloom, and Davis for the U.S. and China. This index scans news articles about a country and records the frequency of phrases that connote economic policy uncertainty. When it’s high, the press is using language that suggests the government could change its regulations, spending, and/or taxes in the near future. As the authors point out, this uncertainty complicates planning and can adversely affect investment. It can also, however, reflect economic conditions themselves; as the economy sours, the political response is often uncertain as sides debate how best to respond.

Until recently, China and the U.S. tracked each other quite well, and such a connection might reflect common economic conditions in the two countries. But China did not share the U.S. experience during the 2001 recession; it shared only the rise in uncertainty. The bottom graph adds GDP growth to the mix, and the “pattern” we see has almost no pattern to it. GDP is slowing in China, but policy uncertainty seems to be hyperactive. Chinese GDP declined during the Great Recession, and since then the decline seems to have been smooth and slight. Policy language, however, has vacillated quite wildly. Perhaps President Obama should feel lucky his stairway remained in place as he descended.

How these graphs were created: Top graph: Search for “Economic Policy Uncertainty Index” and select the U.S. and China among the countries given. Convert both to a quarterly frequency for two reasons: The frequency of U.S. GDP is also quarterly, and the monthly swings in the Chinese index are so great they make it difficult to visualize the U.S. index. Bottom graph: Add two lines to the top graph: seasonally adjusted real U.S. GDP (converting it to a percentage change) and constant China GDP, which should give the U.S. dollar-denominated GDP (again, converting it to a percentage change). For both these new lines, go to the “Format” tab in the “Edit Graph” section and move the units to the right vertical axis. Note: FRED doesn’t have updated Chinese real GDP after 2014, but the latest figure from the National Bureau of Statistics in China puts growth at 6.7% in 2016:Q2, slightly lower than the 7.3% recorded in 2014, as shown in the graph.

Suggested by David Wiczer.

View on FRED, series used in this post: CHIEPUINDXM, GDPC1, RGDPNACNA666NRUG, USEPUINDXM

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