China’s Economy is 12% Smaller than Official Data Say, Study Finds
China’s economy is about 12 per cent smaller than official figures indicate, and its real growth has been overstated by about 2 percentage points annually in recent years, according to research.
The findings in the paper published on Thursday by the Brookings Institution, a Washington think-tank, reinforced longstanding scepticism about Chinese official statistics.
They also add to concerns that China’s slowdown is more severe than the government has acknowledged. Even based on official data, China’s economy grew at its slowest pace since 1990 last year at 6.6 per cent.
The paper’s analysis covers 2008 to 2016, so it does not contain an estimate for last year’s growth in gross domestic product or the size of the Chinese economy. But if 2018 GDP was overstated by the same degree as the authors estimated for 2016, it would imply that actual 2018 GDP was Rmb10.8tn ($1.6tn) below the official figure of Rmb90tn.
The Chinese government’s emphasis on numerical targets — a legacy of Maoist state planning — has made growth in GDP a politically sensitive figure. The Communist party evaluates local cadres’ performance based largely on growth in their respective regions.
“Since local governments are rewarded for meeting growth and investment targets, they have an incentive to skew local statistics,” said the authors led by Chang-Tai Hsieh, economist at the University of Chicago Booth School of Business and research associate at the US National Bureau of Economic Research.
For years, the sum of China’s provincial GDP has exceeded the national figure, a clear sign of statistical inflation at the local level. The National Bureau of Statistics (NBS) has previously acknowledged that “some local statistics are falsified”, and in 2017 the central government accused three provinces in China’s north-east rust belt of fabricating data.
The Brookings paper highlights how the NBS in Beijing struggles to make adjustments to the inflated data it receives from local officials. The analysis finds that the central government’s adjustments to local data are mostly accurate before 2007-08 but “after this date no longer appear to be accurate”.
The NBS said last year that it would assert greater control over provincial data collection beginning in 2019 to eliminate discrepancies between local and national data.
“NBS has done a lot of work to weed out the fake numbers added by local government, but it just doesn’t have enough power and capacity, nor the right incentives,” Michael Zheng Song, economics professor at the Chinese University of Hong Kong and a co-author of the paper, told the FT. “It would be unfair to blame NBS for fabricating GDP numbers.”
The economists use data on collection of value added tax to adjust China’s historical GDP growth series. The tax data, which have been compiled through a computerised system since 2005, are highly resistant to fraud and tampering, they argue.
Mr Song said he had extensive communication with current and former officials from the NBS and the tax bureau, including with Xu Xianchun, former NBS vice director and head of the agency’s national accounts department.
“I was very worried that [Mr Xu] would be upset, but in the end, he was pretty happy. He said to me, ‘You have done serious work, and I appreciate it.’”
The research concluded that official data overstated growth of nominal GDP by an average of 1.7 percentage points per year between 2008 and 2016, which made the economy 12 per cent smaller in 2016 than official figures indicated.
In real terms, GDP growth was overstated by 2 percentage points in the same period, they estimated. But Mr Song cautions that he and his co-authors have less confidence in their estimates of real GDP growth than the nominal figures.
Beyond the headline data, the paper finds that overstatement of investment and industrial output are severe, while official data on consumption and the services sector are more reliable.
In recent years, both local governments and central government policymakers leaders have reduced their emphasis on hard GDP targets.
At the opening of China’s annual rubber-stamp parliament on Tuesday, Chinese premier Li Keqiang announced a GDP growth target of 6-6.5 per cent in 2019.
“Factors like pollution have become much more important for evaluating local officials, so the relative weight of GDP has declined. But it’s still important — if they say 6 to 6.5 per cent, you still have to meet it,” said Chen Long, economist at Gavekal Dragonomics in Beijing.
