Do You Believe Chinese Official Statistics?
Mar 05 2002
Yet again we are being regaled with news that China has the world's fastest growing economy, which in turn generates much loose talk about how investors can tap into the fabulous opportunities offered by such extraordinary economic growth.
According to official statistics the economy grew by 7.3 per cent last year and could achieve 7 per cent growth in the current year. These are indeed impressive figures, seemingly all the more impressive compared with Hong Kong's steady slide into recession and a general cooling of the economy elsewhere in the world.
The big problem however is whether China's economic figures bear more than a passing resemblance to reality. Suspicion about the accuracy of Chinese statistics is hardly new. Even the most ardent China cheerleaders might have noticed that the sum total of provincial economic statistics never match the national figures supplied by the State Statistical Bureau.
Indeed now the Bureau itself is showing concern over the accuracy of the data it is given from the provinces. Zhu Zhixin, a Bureau director, has admitted that "some regions intentionally make false reports." He was also candid enough to admit that the word "some" actually meant that the Bureau had discovered the filing of 62,000 bogus figures last year.
There is a long Chinese tradition of provincial officials trying to curry favour with the central government by telling the big bosses in Beijing that their areas have fulfilled all the targets set for them whether or not this is true. The more zealous have vied with one another to dream up more and more fanciful figures. In the dark days of China's 'Great Leap Forward' when starvation in the countryside was widespread, provincial officials would fill fields with wheat and other cereals at places where Mao Zedong's train passed by to give the impression of plentiful harvests.
Things are not so bad these days, but the tendency to accentuate the positive is almost certainly leading to serious distortions of economic data which invariably exaggerate rather than underestimate economic growth.
Studies by Thomas Rawski, an economics professor at the University of Pittsburgh, argue not merely that China is not hosting the world's fastest growing economy but that it may even be in economic decline. He suggests that in 1998, when official figures showed 7.8 per cent economic growth, the economy is more likely to have registered an economic performance ranging from minus 2 per cent to plus 2 per cent.
In 1999, official figures claim a 7.1 per cent growth rate but Mr Rawski guesses that the real figure is between a decline of 2.5 per cent and an increase of 2 per cent.
He bases these estimates on a rapid decline in energy consumption, which is usually a good indicator of economic performance, particularly in a country with a large industrial base and an agricultural sector increasingly moving towards mechanisation. China's own official energy consumption figures show a 12.8 per cent decline between 1997 and 2000, while claiming a 24.7 per cent real increase in Gross Domestic Product (GDP) in the same period.
Zhang Sai, the former director of the statistical bureau, argues that the drop in energy consumption is explained by a contraction of industries consuming a lot of power and a steady rise of the service sector which is low in energy consumption. This argument is not without logic but fails to explain the massive discrepancy in the GDP and energy consumption figures, which are not matched by a pro-rata increase in the size of the service sector.
Alongside over-reporting of economic growth figures is some serious under reporting by the growing private sector which is not enthusiastic about paying vast amounts of tax. It is impossible to know the extent of understatement here but anecdotal evidence suggests that it is significant.
Most analysts do not go as far as Mr Rawski in suggesting the level of inaccuracy that surrounds Chinese figures. Lehman Brothers, for example, estimates that China's economic growth figures might be exaggerated by no more than 0.5 to 1 per cent.
The reality is that no one really knows the true extent of China's growth rate, but most of those busy pushing China stocks, not to mention Hong Kong-listed stocks described as "China plays," take the official figures at face value and suggest that these levels will be reflected in share values. This is why disappointment sets in so quickly, because earnings of China stocks are rarely as strong as might be expected from a booming economy. However if the economy is not really booming to the extent suggested by these fanciful figures, the relatively lackluster earnings of China related stocks makes more sense.
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