The numbers game

ON A RECENT visit to the South China Morning Post, economist Nicholas Lardy got worked up, as economists do, about numbers.

Why he got excited can be summed up in three letters: WTO. A small but influential group of China watchers say that China has lied about its growth and the openness of its market.

The critics - call it the revisionist school of Chinese economic performance - argue that China's entry last December to the World Trade Organisation will trigger the collapse of an economy already sagging under rising unemployment, growing income inequality, and economic mismanagement.

Rather than open its market to the world, so this school contends, China will follow in Japan's footsteps, exploiting WTO loopholes to keep its market closed.

The reduction of China's spectacular growth to fiction may make sense from the point of view of playing devil's advocate, but it cripples the political logic that Beijing used to push forward its WTO membership during 15 years of negotiations.

Beijing sold the deal by arguing that WTO would be good for China by enhancing its prestige and strengthening its economy. If neither result pans out - or if WTO is perceived to undermine China's prestige and damage its economy - the reform process, as well as the politicians behind it, may be endangered.

Mr Lardy's most recent book, Integrating China into the Global Economy, details the extraordinary concessions that China made in order to win approval to join WTO. China is the only country that is subject to a separate compliance review, for example.

When Mr Lardy's book is published in China next month, 'it will make a wide readership in China aware of how they were discriminated against', he said.

Members of the revisionist school include lawyer Gordon Chang and journalist Joe Studwell, who have written books claiming that both China's economic success and the attractions of the market are delusory.

Recently, their perspective has gained support from Thomas Rawski, an economist at the University of Pittsburgh. At a symposium last autumn on the problems with Chinese statistics, hosted by the China Economic Review, Mr Rawski challenged official data that showed China grew by 34.5 per cent between 1998 and last year.

Other countries have had comparable growth spurts - Japan's gross national product grew by 52.8 per cent between 1957 and 1961, at the height of its miracle. But China's miracle in the past few years has been accompanied by price deflation, high unemployment, and a sharp contraction in energy demand.

Mr Rawski came up with a revised growth series that showed cumulative growth for the four years was no higher than 11.4 per cent and possibly as low as 0.4 per cent. He argued that the Chinese numbers reflected a 'statistical bubble' that drifted up from provincial and local levels, which routinely inflate economic data. In other words, they lied.

According to Mr Lardy's 'eyeball test', however, the 'official figures are fairly close to reality'.

'The long-term-collapse people have latched on to the argument that the Government has overstated growth, so that the economy is actually more fragile than it seems, and that WTO pressures will force the economy over the edge,' Mr Lardy said.

He also finds overblown claims that the China market is more bust than bonanza. 'One of the biggest myths' is that foreign investors are hiding huge losses in the China market.

Average rates of return on foreign investment were 10 per cent and rising, he said. 'Companies doing well keep a very low profile. Those having difficulty are more willing to talk.' The 10 per cent figure is based on tax figures and is an average. 'If the numbers say 10, that's a floor not a ceiling.'

Mr Lardy is no apologist for Beijing. As a senior fellow at Brookings Institution, the liberal, Washington DC-based think-tank, he has crunched the numbers on China's non-performing loans and exposed weaknesses of the country's policy-driven financial system in his many publications.

Nonetheless, Mr Lardy and Beijing think alike on the debate over China's economic performance. Both worry about the potential of the debate to undermine China's political commitment to WTO, which a soon-to-be-retiring echelon of top leaders hope to serve up as their legacy.

China's entry to WTO was the single riskiest act of a political leadership that is nearing a major transition when the 16th Party Congress declares successors to President Jiang Zemin, and Premier Zhu Rongji.

Mr Zhu, architect of China's reforms, told Mr Lardy last March that while he had known WTO would be a mixture of costs and benefits, 'so far we've only seen the costs'. In addition to the political implications, the numbers debate also casts a pall over China's ability to use WTO mechanisms to drive forward domestic economic reforms. Under Mr Zhu, China has viewed its WTO membership as a stepping stone to global prominence.

Mr Zhu's apparent vision is for WTO to serve as a platform for China to take the lead in setting global trade rules.

One European diplomat said: 'They take the international trade system very seriously and see themselves as leaders, which they are. It's not just China as the poor victim opening its doors and markets. They feel it's a quantum shift in their role in the world.'

Within WTO, China has adopted a role as free trade champion, joining the European Union and Japan in filing complaints against the legality of steel tariffs of up to 30 per cent imposed by the United States in March.

It has also stepped into the big leagues by imposing temporary tariffs on its own steel imports, allowed under WTO rules, in order to prevent diversion of global steel exports to China.

'It's taken China so long to get into WTO, and it's pretty clear that they will be proactive,' said Leora Blumberg, an SAR-based international trade consultant.

At WTO headquarters in Geneva, 'China is playing a steady and strategic hand in becoming a major player,' said Rachel Thompson, associate director of global trade practice at Apco in London. Although it has taken issue with the US over steel, Ms Thompson argues it is 'picking its issues and coalitions carefully. It's not so black and white that China will become the biggest ally of the developing countries'.

Mr Lardy thinks China can be an enormously positive force in WTO by using the organisation to reinforce its own reform agenda and by demanding changes in opaque practices that have grown up over nearly a half century of trade negotiations based on principles of swapping concessions across the ranks of its members.

China could serve as a bridge between the developing and developed members of WTO. It was the first country in the world, Mr Lardy said, that would have both economic superpower status and a low per capita income, giving it a foot in both camps.

As a vigorous participant and leader in WTO, China could help to preserve momentum for free trade in a world where fear of globalisation is creating a backlash against open markets. This will not happen if the next Chinese leadership falters in its commitment to WTO.

The scepticism that lies behind the numbers is healthy, but arguments that make a myth of China's miracle are the kind of intellectual folly that also have a destructive edge.

Graphic: gdp31gbz