No reason to believe China falsifies its national economic data

Recently, the National Bureau of Statistics of China reported a rate of growth of real gross domestic product of 6.9 per cent for 2017, an increase from the 6.7 per cent in 2016, and higher than the target rate of growth for the year.

This announcement was welcomed by much of the world as a sign that China has finally and successfully made the transition to its “new normal”. However, it was also met with the usual scepticism in some quarters, especially because of the recent voluntary revelations by Inner Mongolia, Liaoning and the Binhai district of Tianjin, that local officials had overstated their economic data in the past.

The fact that the National Bureau of Statistics does not take the provincial, regional or municipal statistics at their face value is quite well known. Its estimates of the national GDP do not rely solely on the local estimates.

If one compares the GDP-weighted average annual rate of growth of provincial GDPs and the annual rate of growth of the national GDP, all published in the annual China Statistical Yearbook, one finds that, since 1993, the weighted average rate has been consistently higher than the national rate by a couple of percentage points.

If one uses quarterly data, which is available since 2005, a similar picture emerges.

Such charts show conclusively that the bureau has always tried to adjust the local data before producing the national estimates.

The consistent discrepancies between the weighted average provincial and national rates of growth also indicate that the local data is not reliable and is probably falsified.

What are the incentives for the falsification of data, upwards or downwards, at the local level? For an up-and-coming local party secretary, the rate of growth of local GDP is a key performance indicator. If he or she would like to be promoted, they would have to be able to report a high rate of growth. However, for an official near the end of their career, for example, they might not want to overstate the economic results but instead would understate them so as to lower the locality’s contribution of revenue to the central government and retain more resources for the locality, where the official will retire. Thus, the “falsification” can occur in both directions.

One may also speculate about why these revelations are occurring now. One interpretation is that 2017 was the year in which all the top local officials were being replaced. So it makes sense for the new appointee to come clean, so that he or she can start with a low base from which to measure growth.

There is, of course, the risk that the predecessor might be offended. However, if the predecessor is already in trouble for other reasons – for example, with past corruption – there is no downside to blaming everything on him or her. This strategy is not much different from a newly arrived CEO at a company taking a big write-off so that it is easier for him or her to look good later.

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Having said that, it is also worth pointing out that provincial GDPs are in fact notoriously difficult to measure, just like state GDPs in the United States, because there is no customs control across provincial or state borders. The net exports of a province or state is therefore extremely difficult to ascertain because there is no real reporting requirements for interprovincial or interstate trade.

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While there are incentives for local officials to falsify the economic data, there is actually little real incentive for the central government to falsify the data. In fact, as the lesson of the Great Leap Forward illustrates, false data might actually lead to the wrong policy decisions. There is no evidence of a systematic falsification of data, either upwards or downwards, at the central government level, since economic reform began in China in 1978. There may be inaccuracies, omissions and fraudulent reporting (for example, over- or under-invoicing of exports or imports), but no intentional falsification of data.

Falsifying publicly distributed data provides the wrong signals to enterprises, households and governments of all levels. For people to think that the rate of growth is higher than it actually is – for example, thinking it is 8 per cent when it is actually 4 per cent – poses huge risks. The converse – thinking the rate of growth is lower than it is – is also risky. Acting on the wrong information can do enormous damage to the economy.

There is no benefit to China whatsoever to falsify the economic data. And the Chinese economy can easily survive a rate of growth lower than 6 per cent. Falsification of data risks not only confusing one’s enemies and competitors but also one’s allies, friends and colleagues.

Some observers point to the smoothness of the Chinese growth data as proof of falsification. There is no accepted criterion of when data should be considered too smooth. However, aggregating over a large and diverse geographical area such as China inevitably results in reasonably smooth data because the outliers are averaged out. Smooth data can also be the outcome of successful macroeconomic management rather than falsification.

Finally, another frequently mentioned reason for scepticism is based on the “Keqiang Index”, named after Chinese Premier Li Keqiang. The index, constructed by some Chinese economy watchers, tries to mimic the rate of growth of real GDP by taking a weighted average of the rates of growth of railway cargo volume, electricity consumption and loans disbursed by banks. These were reportedly the preferred macroeconomic performance indicators of Li when he served as the party secretary of Liaoning, as he supposedly told a US diplomat in a private conversation in 2007, according to WikiLeaks.

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However, the index has not tracked the Chinese economy well in recent years because the service sector has become the most important sector as well as the fastest-growing sector in the economy. In 2017, the distribution of Chinese GDP by production sectors was approximately: primary (agriculture), 7.9 per cent; secondary (manufacturing, mining and construction), 40.5 per cent; and tertiary (services), 51.6 per cent.

Since the service sector does not require much fixed-asset investment, in particular, not much machinery and equipment, it does not need to consume much electricity or require much cargo shipment to generate GDP. Its working capital requirements are also relatively low since inventory is minimal.

Traditional data becomes less representative of the real Chinese economy

Moreover, the Chinese industrial sector has also become more energy-efficient over time. Thus, the rate of growth of electricity consumption is no longer a good indicator of the rate of growth of industrial production as it does not take into account the increased energy efficiency of the new production capacities. Projections based on the “Keqiang Index” are therefore likely to understate the rate of growth of real GDP.

In conclusion, even though Chinese economic statistics are far from perfect, they are the most reliable data available, and there is no evidence of intentional or systematic falsification by the National Bureau of Statistics.

Lawrence J. Lau is the Ralph and Claire Landau Professor of Economics at the Chinese University of Hong Kong