The Economist: China - How cooked are the books?

The Economist: China - How cooked are the books?

Mar 14th 2002 BEIJING

China' parliament was this week set to endorse the government' plan to achieve 7% economic growth this year. But how will anyone know if the target is reached?

ADDING up the value of goods and services produced in an economy is hard enough anywhere. In China, the problem is magnified by the country' size, the rapidly shifting make-up of its quasi-market system and the widespread tendency among officials to lie in order to boost their political fortunes. Last month the government said that China' GDP had grown by 7.3% last year, making it the world' fastest-growing large economy. But growth figures declared by individual provinces told a different story. Only one, Yunnan, said its product has grown more slowly than the national rate. Taken together, the provincial figures would produce a national growth rate nearly two points higher than the one officially declared.

Fortunately, the central government does not rely entirely on dodgy provincial statistics to arrive at its national growth-rate figure. Instead, the National Bureau of Statistics conducts sample surveys and uses these to estimate the country' GDP and thence the growth rate. The result has invariably been at odds with the provincial figures. In 1995, the GDP growth rate suggested by provincial data was three percentage points higher than the figure of 10.5% produced by sample surveys.

But are the results produced by sample surveys really much better? Opinions vary. The government insists its figures for GDP growth are reliable. Some analysts such as Pu Yonghao of Nomura International in Hong Kong believe they are indeed more or less accurate.

In China, few scholars have publicly attempted any detailed justification of alternative figures, partly because of the political sensitivity of challenging government claims. Some, like Song Guoqing, a senior economist at an independent think-tank, the Stock Exchange Executive Council, believe that last year' growth rate could have been as low as 5% or 6%. Outside China, however, some economists believe the official growth rate could be even more at odds with reality, because of such factors as a tendency to overvalue the stocks of unsold goods produced by state-owned factories or to underestimate inflation. Thomas Rawski of the University of Pittsburgh estimates that growth in 2001 may have been between 3% and 4%, or about half of the official figure.

In a paper published late last year, Mr Rawski says that the National Bureau of Statistics “lacks the capacity to collect data outside normal information channels”, and its surveys are subject to interference from lower-level officials. In the first ten months of last year, the authorities uncovered more than 62,000 offences against the country' statistics law. In the minds of many officials, the gains from falsifying figures outweigh the risk of punishment.

The pressure to exaggerate statistics grew in the late 1990s as Chinese officials sought to pump up the economy to stave off the effects of the Asian slump. Last year China' Prime Minister, Zhu Rongji, tried to restore normality by stressing that the central government' GDP growth target was intended as a guideline rather than an obligatory goal. But it has proved difficult to get that message across to officials still steeped in the thinking of the old centrally-planned economy.

Mr Rawski believes that other Chinese statistics provide clues to the real rate of growth. In the three years between 1997 and 2000, for example, China' GDP officially grew by 24.7%. Yet energy consumption dropped by 12.8% in the same period. Mr Rawski argues that this cannot be adequately explained by more efficient energy consumption or the rapid growth of industries requiring less energy. He notes that periods of rapid economic growth in other Asian countries, as well as in China itself ten years ago, have coincided with increased energy use, high employment and rising consumer prices. Between 1997 and 2001, employment hardly grew at all, while prices fell more than 2%.

Another clue comes from the civil-aviation industry. Chinese airline passengers belong to the richest part of the population, whose incomes are rising faster than average. Passenger traffic should therefore grow faster than disposable income, a main component when calculating GDP based on national income. But Mr Rawski notes that, despite plunging ticket prices in 1998, passenger miles rose by only 2.2% on domestic routes between 1997 and 1998. In those years the economy was officially said to have grown by 8.8% and 7.8% respectively.

Other factors, however, might push the real GDP growth rate closer to the official one. Mao Yushi of the Unirule Institute of Economics in Beijing says he believes Zhejiang province in eastern China has been under-reporting its growth figures to conceal the rapid development of private enterprise in its economy. Mr Pu of Nomura says affluent provinces such as Guangdong in southern China may be under-reporting their growth to avoid having to pay more tax to the central government.

During its annual two-week session, which was due to end on March 15th, China' parliament has heard no public objections to the government' goal of 7% growth this year. Even if the figure is overstated by a couple of percentage points, growth will still be strong compared with most of Asia. But for those in pursuit of statistical truth, the coming year is unlikely to see much progress in China.

http://www.economist.com/world/asia/displayStory.cfm?story_id=1034342