Lies, Damned Lies, and Chinese Statistics

Who’s cooking Beijing’s books?

On Wednesday, U.S. Treasury Secretary Jack Lew met with China's Premier Li Keqiang, a crucial first meeting between new representatives of the world's two biggest economic powers. Lew's interlocutor sits at the top of the world's second-largest economy -- a country whose GDP reached approximately $8.3 trillion in 2012. But how accurate are the statistics that illuminate China's growth? Even Li himself has said (as quoted in a U.S. State Department cable published by WikiLeaks) that China's GDP figures are "man-made" and therefore unreliable. In this excerpt from his book, Understanding China's Economic Indicators, Wall Street Journal China reporter Tom Orlik explains how to get to grips with China's data.

Americans seem to think that the production of China's economic data is a crude political farce: the controlling hand of the Communist Party intervening arbitrarily to direct the level of key indicators before they are published. In the past, that image was not too far from reality.

In the 1958-1961 Great Leap Forward, Chairman Mao's disastrous attempt to shift a backward agrarian economy to a modern industrial powerhouse, the failure of the statistical system contributed to catastrophe on a grand scale. Mao's plan, such as it was, required producing an agricultural surplus that could be sold to fund investment in a modern industrial base. Whipped into a patriotic frenzy, and knowing that their future depended on meeting unrealistic targets for the production of grain, local officials engaged in rampant exaggeration of output.

But reality was distorted at a cost. The higher the production figures, the greater the tax owed to the central government. In some areas, the exaggerated claims were so great that the entire harvest had to be handed over as tax, used to fund investments and extravagances that China could ill afford. In some parts of the country, the only crops left behind were grown by villagers in secret locations, away from the acquisitive eye of the local production teams. But such success stories were few and far between. Tens of millions died in history's greatest man-made famine.

Some things have stayed the same in the last 50 years, but a lot has changed. At its root, the cause of over-reporting output during the Great Leap Forward was the divided loyalties of local officials, torn between the reality of stubbornly unchanging grain yield and career ambitions that depended on meeting unrealistic targets for output.

That conflict of interest was slow to be resolved. The biggest reform-era controversy over China's economic data, a GDP growth figure for 1998 that many experts regard as grossly inflated, has been laid at the door of the exaggerated claims made by local officials. But the National Bureau of Statistics (NBS) -- the arm of the government that manages China's data system -- no longer relies on the unreliable inputs it receives from local bureaus. Across the range of key industrial output, fixed asset investment, and retail sales data, the largest enterprises in the country report directly to the NBS in Beijing.

Where there is a conflict between local and national data, the NBS typically resolves it in favor of the reliable national figures. The national GDP data announced every year by the NBS, for example, is consistently below the sum of the GDP reported by the provinces. That's often seen as a sign that there's something rotten with China's data, but in fact, it's evidence that the NBS has taken steps to free national data from the influence of local exaggeration.

The second problem that bedeviled the grain data during the Great Leap Forward was the belief that boosting morale through exaggerated claims was more important than reporting reality. The audience for China's economic data might have expanded beyond the agricultural workers of the 1950s, but the numbers continue to play a role at home and abroad in buoying confidence in the China growth story. The magic 8 percent target for growth, which China maintained for many years before downshifting to 7.5 percent in 2012, had an almost talismanic significance.

If the government is ever tempted to play fast and loose with the statistical reality, though, there are also forces pulling in the other direction. The Information Age has reduced the scope for the use of economic data as an instrument of propaganda. Official numbers are available instantly around the world over the Internet. A horde of sophisticated and cynical journalists, spreadsheet-wielding economists, and hard-nosed investors are following every hiccup in the Chinese economy.

Measuring a rapidly changing economy remains a challenge. One of the problems of the Great Leap Forward was that China's leaders were blinded by a belief in their own hocus-pocus technology. Mao may have genuinely believed that revolutionary fervor plus new planting techniques could result in massive increases in grain output. Changes in production techniques made it more difficult to measure output, or at least obscured for a time the fact that output was little changed.

The dislocations of reform-era China are less wrenching than those of the 1950s, but the mainland is still changing fast. The economy is many times larger today than it was in 1978, new sectors like e-commerce are driving increases in output and employment, new products are entering consumers' shopping baskets, and new property is coming online in the housing market. To keep track of GDP, the NBS has expanded its survey from a primitive 16 sectors to a more respectable 94, and has significantly improved its coverage of the services -- where areas like private education and health care are playing a new and important role in the economy.

But in other areas, surveying tools and techniques have been slow to adapt to a changing reality. Consider China's creaking system for measuring developments in labor markets. In 1978, 100 percent of the workforce was employed in the state sector, and a survey based on state-owned enterprises worked well enough to track changes in wages. Many more workers have private-sector jobs now, however, so a wage data survey that continues to focus on a privileged subset of state-sector workers makes little sense. Survey tools that lag behind the reality of a changing China are a more serious problem for China's economic data than political interference.

A recalcitrant population continues to add to the problems. The NBS doesn't provoke the same kind of anxiety as the Public Security Bureau, or the State Administration of Taxation. But a public culture of deceit when it comes to dealing with officials of any kind makes it difficult for the NBS to collect solid baseline information. In the Great Leap Forward, peasants growing crops outside the greedy gaze of the local production team distorted the data. Fifty years later, the problem is small businesses that keep three sets of books -- one for the taxman, one for investors, and one for themselves -- or rich households that refuse to disclose the income they receive from graft. But the problem of a sample set that is incapable of telling the truth to anyone in an official badge remains, and that adds to the difficulties the NBS faces.

Finally, the NBS and other arms of the government charged with the production of China's economic data do themselves no favors by treating straightforward information on methodology with a degree of secrecy more suited to guarding the location of nuclear weapon silos. Transparency on the methodology underpinning key data points has improved considerably from the situation a few years ago. In 2010, for example, the results of a new effort to measure wages in the private sector were published alongside details of the survey approach and a discussion of some of its limitations. But crucial details of the methodology on key indicators are still kept hidden. By withholding key details of how the official data is calculated, the NBS and other institutions raise doubts, perhaps unnecessarily, about its reliability.

The reality of China's official data today is not the crude controlling hand of the Politburo dictating the GDP growth figure. It is an increasingly reliable and comprehensive set of economic indicators that remain compromised in some areas by the difficulty of measuring a rapidly changing economy, imperfect surveying methods, a recalcitrant sample set (the Chinese public), and continued political sensitivity. The system is not perfect. But neither is it a farce.



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