Download The art of Chinese massage

The art of Chinese massage
May 21st 2009
From The Economist print edition
Is China overstating its true rate of growth?
PART of the recent optimism in world markets rests on
the belief that China's fiscal-stimulus package is
boosting its economy and that GDP growth could come
close to the government's target of 8% this year. Some
economists, however, suspect that the figures overstate
the economy's true growth rate and that Beijing would
report 8% regardless of the truth. Is China cheating?
Economists have long doubted the credibility of Chinese
data and it is widely accepted that GDP growth was
overstated during the previous two downturns. In 199899, during the Asian financial crisis, China's GDP grew
by an average of 7.7%, according to official figures.
However, using alternative measures of activity, such
as energy production, air travel and imports, Thomas
Rawski of the University of Pittsburgh calculated that
the growth rate was at best 2%. Other economists reckon
that Mr Rawski was too pessimistic. Arthur Kroeber of
Dragonomics, a research firm in Beijing, estimates GDP
growth was around 5% in 1998-99, for example. The top
chart, plotting the official growth rate against
estimates by Dragonomics, clearly suggests that some
massaging of the government statistics may have gone
on. The biggest adjustment seems to have been made in
1989, the year of political protests in Tiananmen
Square. Officially, GDP grew by over 4%; Dragonomics
reckons it actually declined by 1.5%.
China's growth in the first quarter of this year has
led some to conclude that the government is up to the
same old tricks. According to official figures, GDP was
6.1% higher than a year earlier. Yet electricity
production in the first quarter was 4% lower than it
had been a year earlier; in comparison, production grew
by 16% in the year to the first quarter of 2008. In the
past, GDP and electricity output have moved broadly
together, although it is not a one-to-one relationship
(see bottom chart). But the gap between the two lines
is now wider than it has ever been. Given that power
statistics are less likely to have been tampered with
than politically sensitive GDP figures, is this
evidence that the latter have been fiddled?
Probably not. Paul Cavey, an economist at Macquarie
Securities, argues that the discrepancy is explained by
the fact that energy-guzzling heavy industries, such as
steel and aluminium, bore the brunt of the slowdown
last year. Mr Cavey calculates that the metals industry
accounted for 40% of the growth in electricity
consumption in 2001-07, but only 16% of the increase in
industrial production. Steel output fell by more than
10% in the year to the fourth quarter, so it is hardly
surprising that energy use dropped.
Distrust of the GDP numbers has prompted Capital
Economics, a research firm based in London, to create
its own proxy of economic activity, which includes
electricity output, domestic freight volumes, cargo
traffic at ports, passenger transport and floor area
under construction. It suggests that GDP growth slowed
to only 4% in the year to the first quarter. However,
it tracks mostly industrial activity, and thus excludes
two-fifths of the economy, most notably services, which
are growing faster.
Then there are government tax revenues. These have
fallen by 10% over the past year, compared with a surge
of 35% in early 2008, suggesting that incomes and
output have tumbled. But Stephen Green, an economist at
Standard Chartered, says that revenues were inflated in
early 2008 by a sharp rise in taxes from the boom in
land sales, which has since subsided. Another possible
distortion is that local officials may be hiding tax
revenue to make their finances appear worse, in order
to get more money from Beijing to finance
infrastructure projects.
Overall, Dragonomics's Mr Kroeber thinks that GDP
growth in the year to the first quarter of 2009 was not
significantly overstated. One reason why others are
more suspicious is the fact that the National Bureau of
Statistics (NBS) does not publish quarterly GDP figures
as developed economies do; its year-on-year changes
give it more scope to smooth growth rates (for example,
output probably did stall over the past two quarters).
To be fair, many developing countries do this as well.
One reason is that seasonal adjustment is tricky in
such countries where the shift from agriculture to
industry changes the pattern of seasonality over time,
says Mr Kroeber.
Cutting the fudge
And for all today's misgivings, Beijing's growth
estimates consistently proved to be too low until
recently. One of the quirks of Chinese data has long
been that the provinces reported higher numbers than
the central government did—a phenomenon that was put
down to the fact that local officials inflated growth
rates in order to get promoted. Yet the NBS GDP figures
have almost always been revised upwards. For example,
growth in 2007 was first reported as 11.4%, but in
January it was marked up to 13%.
The NBS has improved its data-gathering methods in
recent years, by extending its coverage of services,
for example. This month Beijing also introduced new
penalties for officials who falsify statistics. But the
real test is whether the government itself is prepared
to publish politically embarrassing bad news. There are
encouraging signs that it is becoming more open. On May
14th an essay on the NBS website by Xu Xianchun, the
bureau's deputy director, was surprisingly frank about
some of the flaws in Chinese statistics. Mr Xu
admitted, for example, that the retail-sales numbers
include some purchases by companies and the government,
which should not be counted as consumption. He
estimated that consumer spending in the first quarter
grew by 9%, compared with the 15% increase reported for
retail sales.
Andy Rothman, an economist at CLSA, a regional broker,
believes that Chinese statistics are much more
trustworthy than they used to be. This is partly
because there are alternative numbers to go on; CLSA,
for example, produces its own purchasing-managers'
index. There are also more private-sector economists
keeping tabs on China than there were a decade ago. The
more eyes there are on China, and the more crucial its
economic performance becomes for the rest of the world,
the harder it is for officials to tamper with the
speedometer.