Chinese Data: How Reliable Is It?
One of the most eagerly awaited data releases this week (Thursday, in fact) will be China’s Q4 2008 real GDP data, which will complete the growth figures for last year and give us an indicator of the pace of deceleration we can expect in 2009. However, the very fact that China last week revised up 2007 growth to 13.0% from 11.9% previously raises the question of how accurate Chinese data actually is.
Gone are the days when China revealed Q4 data a few days before the end of the quarter, which was common practice as recently as a few years ago. That was patently absurd, given that most countries require at least several weeks to add up the data, and given China’s sheer geographical and demographic size. However, the data conundrum still stirs up debate.
The Underestimation Camp
Of those who believe that China understates its true GDP figures, the argument goes as follows: if you add up the gross domestic provincial product figures, you get a number bigger than China’s national GDP. (I seem to recall one investment bank argued this case last year.)
But why would this happen? The answer is that provincial party leaderships have an incentive to report strong growth, which would play well with the central government and could see the provincial party secretary and his allies fast-tracked for promotion to the national leadership in Beijing. Glowing growth figures would also attract more foreign investment.
As to why the central government would seek to understate China’s GDP growth, bear in mind that prior to late 2008, everyone was more concerned that China was growing dangerously fast, raising fears about a hard landing. Thus, coming out with 13%-plus growth rates (as opposed to 11%-plus rates) could have created the impression that the economy was dangerously out of control – despite aggressive monetary tightening and a rising yuan currency.
The Overestimation Camp
However, there has long been a camp that believes that China is growing more slowly than officially stated. In this article, the author argues that electricity consumption figures point to a Chinese economy growing at 4.5-6.0% annually, compared with 10%-plus rates. Of course, this assumes that electricity consumption figures are accurate.
As to why Chinese officials would overestimate growth, the answer is obvious: to make them sound more impressive to their own citizens for the sake of national prestige, and (again) to attract more foreign investment.
There is also a school of thought that China under- or overestimates GDP growth to smooth out volatility, because see-sawing might reveal weaknesses in the economy.
Will We Know If China’s Economy Slows Sharply?
All this begs the question of whether we will ever know if China’s growth rate slows below the 7.0-8.0% widely considered necessary to maintain employment levels and social stability.
Let us suppose that Q4 growth slows to 6.0% y-o-y. There is nothing to stop the authorities from saying that GDP grew by 8.0%. What would be ominous is if the authorities announce an unexpected delay in the GDP release. However, the actual numbers alone may not be enough to maintain stability. Manipulated numbers would be insufficient to mask real problems such as weakening exports, rising joblessness, and potential capital flight. Thus, if Chinese policymakers choose to cheat with data, they would ultimately only be cheating themselves.