The truth behind China’s numbers
FEW can doubt the importance of China to the world today. But as research by the World Bank’s International Comparison Program has highlighted – the country may be close to becoming as large an economy as the US on a purchasing power parity basis – China’s actual size and the speed of its growth are both open to debate. And wider problems in China’s statistics aren’t just of academic interest. They may have implications for the country’s shift from export to consumer-driven growth.
Witness, for example, the divergence between figures for China’s national GDP and the collective total of provincial GDP. The gap has increased over time (although it finally looks to be falling), with the provincial total at one point in excess of 10 per cent of the national figure, creating an on-paper GDP surplus equivalent to the country’s export powerhouse Guangdong. Effectively, this add-on represented a statistical phantom province.
This gap between central and provincial economic figures comes from local authorities massaging-up their local data. A prime example is Henglan County in Guangdong, where local officials were found by the National Bureau of Statistics to have inflated industrial output figures for 71 companies, from a real figure of 2.2bn yuan, to a whopping 8.5bn yuan. They multiplied the data by four, and presumably knocked a bit off to make it look more “plausible”. And this is no isolated case.
Even Chinese premier Li Keqiang has been quoted as stating that China’s GDP figure is “man-made”, citing other indicators as being more indicative of what is really going on in the economy. But other measures, like Purchasing Managers’ Indices (PMIs), or power supply and concrete consumption, do not really measure the fastest growing segment of the Chinese economy: consumer spending on goods, and especially on services.
This is important. Much concern has been expressed about China’s slowdown – even though its economy has almost doubled in size in the last six years. But the crucial context is the country’s retooling away from an export manufacturing growth model towards one driven by domestic consumption. Of course, that requires time to adapt and brings with it economic pain, but China cannot forego the process in the long term.
Yet this shift is being hindered by inefficiency born of wasted capital – sunk into dubious grand projects and invested in propping up lacklustre state-owned enterprises. This poses numerous challenges, including the problem of facing up to the vested interests that have made fortunes from the status quo, rising levels of corporate and public debt, and systemic corruption. These all hold back the growth of China’s most dynamic sector – private enterprise. But tackling these problems, and the consumer pivot itself, is made all the more difficult because Chinese statistics don’t accurately reflect the economy on the ground.
There are further dimensions. Appalling pollution may be exacerbated by a deficit in Chinese corporate compliance with existing regulations. Accounts misconduct is also commonplace, while due diligence has become a big issue when investing in Chinese corporates. A case in point is US manufacturer Caterpillar, which in January 2013 took a $580m write-down on the value of a Chinese company it had bought in 2012, alleging “deliberate, multiyear coordinated accounting misconduct”. But again, this is no isolated case.
As China shifts emphasis towards domestic consumption, the retail market and consumer spending become even more important. But here too figures are unreliable. The headline figure quoted as retail sales by the statistical authorities, for instance, is not true retail sales, and includes much non-retail activity. Data on the fast-growing services sector is also greatly under-reported. Further, what consumers really earn is hotly debated. The government has admitted that its own Gini coefficient (measuring the gap between the richest and poorest) is probably wrong due to under-reporting of assets and income among higher-earning households.
The importance of China to the global economy means we all need to better understand its economic data. My 20 years of research on China’s domestic market has taught me circumspection about the published statistics, and to use as wide a range of sources as possible. While the above story may sound miserable, there is now much more data available and it is getting better. The trick is knowing how to sift through the mass of numbers, and to read between the lines to make sense of them.
Matthew Crabbe is a China consumer market analyst and author of Myth-Busting China’s Numbers (Palgrave Macmillan).