China’s economic data unfairly questioned

By Mike Cormack Source:Global Times Published: 2018/2/4 22:38:39

Illustration: Liu Rui/GT

Recently, a number of Chinese provinces have restated their GDP data, with marked reductions showing up in adjusted reports from Tianjin's Binhai New Area, Liaoning and Inner Mongolia. The news was received outside China with considerable cynicism. Chinese GDP, it has been suggested, has been growing too uniformly for the data to be real, with no shocks or booms and busts that mark economies elsewhere. Though growth has faded from around 10 percent in the early 2000s, it came in at a hefty 6.9 percent in 2017, up slightly from the 6.8 percent reported in 2016.

It's worth noting the degree to which Chinese economic data is routinely dismissed by Western economic commentators. There are good reasons for skepticism. We've seen an uncoupling of what was called the "Li Keqiang Index," by which GDP growth correlated to rises in indices like freight and electricity.

With services accounting for 51.6 percent of China's GDP in 2016, which correlate to fewer of these industrial markers, GDP growth no longer rises in direct proportion to indices which may in fact see reversals, with energy and logistical efficiencies. Advanced, globally-integrated, economies similarly are having significant issues in accounting for integrated services across the industrial chain. What share should Foxconn take in producing iPhones, for example? Are its processes intellectual property? Judging growth is thus harder than ever.

But perhaps the real sources of skepticism are twofold: China's governing structure and its financial controls. In the first case, Chinese provinces have a great deal of sway over their economies, where they are actors in their own right to a degree unparalleled in Western economies. They form what former World Bank director Yukon Huang called in his recent book Cracking The China Conundrum a "regionally decentralized competitive system," where provincial and county governments were motivated both by growth targets and competitive pressures, effectively fighting for foreign direct investment, jobs, and so forth.

This minimizes the inefficiencies of central planning, as seen in the Soviet system. By injecting rigorous competition and given that government policy holds sway to a degree unthinkable in Western countries, China's provinces rather than the central government largely dictate policy and ensure growth. While some may have felt that the collapse of the Soviet Union showed socialist systems were doomed to fail, China has demonstrated that there are many ways to skin a cat.

Another issue in China's governing structure is inherent to its socialist system under the Communist Party. This gives China control over its economy that can be highly effective when the policy is right, but it also means that there are no independent bodies in the system. And since provincial leaders are under pressure to improve economic development, with GDP a key performance indicator, without independent external assessment, the temptation will always be to nudge the numbers higher than reality merits. Even party secretaries are only human.

Similarly, financial controls are too often found lacking to the point of making observers incredulous. Just last week, the China Banking Regulatory Commission (CBRC) revealed that it had fined Shanghai Pudong Development Bank (SPD) 462 million yuan ($73.4 million) after the bank's Chengdu branch fraudulently issued an astonishing 77.5-billion-yuan worth of credit lines. This is a fraud on a huge scale, totaling about one third of the bank's total revenues, from errant behavior in just one branch.

The CBRC may be cracking down on dubious financial activities, but the sheer scale of the SPD's fraud is hugely disquieting and reinforces questions about bad loans, off-balance-sheet lending, shadow banking, over-leveraging and other symptoms of poor financial decision making and questionable economic results.

It's true, of course, that Chinese GDP revisions are hardly unique. Every country revises its economic data when additional information becomes available. Sometimes this can have direct political consequences. British trade figures in the 1960s and 1970s were keenly awaited at a time when the pound was under huge downward pressure. The Harold Wilson government in 1969 discovered that exports had been accidentally and significantly understated so that the economic situation was actually rather better than thought. The perceived poor economic performance saw Labour perform badly in elections. But the British government has a strict division between elected and permanent officials. This gives British statistical data a credibility that transcends its exact correctness. There was no question of the figures having been altered to benefit the Conservative party, or indeed anyone else.

What could China do to reduce skepticism? Independent, non-governmental, non-party statisticians and economic actuaries are the only real way - just as large companies have external auditors. Otherwise China will have to accept that its governing structure has economic advantages and disadvantages: it may ensure control of the domestic economy, but it cannot control what others think of it. And these opinions can have real-world consequences.

The author has been a freelance journalist in China since 2008. Follow him on Twitter at @bucketoftongues.

Posted in: VIEWPOINT

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