Why I Don’t Believe Chinese GDP Data

Even the Premier doesn't believe it

Christopher Balding , September 4, 2015 9:19am

couple of articles have been written attempting to defend Chinese GDP data.  I have received questions about them and think it will be helpful to address these articles.  It is interesting to me that articles defending Chinese GDP data spend so little time studying official Chinese GDP data or claim that it is true because it is equal to itself.

One writer chalks this concern up to a bunch of “conspiracy theor(ies)”. This type of thinking reveals nothing more than a complete ignorance of the issue and overall facts.  No less than the second in command of China, Premier Li Keqiang, has stated that Chinese GDP data is unreliable and “man-made”.  To put this in perspective, the current Premier of China, second in command for the entire country, leading economic policy formulation, a Phd in economics, having spent essentially all his career inside public administration in various posts throughout China advises you not to trust GDP figures or the economics professor in the United States who has never lived in China and has no specific expertise in China.  It stands near the pinnacle of hubris for a professor to correct someone with this depth of knowledge.  Astoundingly, other measures of economic activity such as electricity production and freight traffic are criticized as proxy measures.  While both are undoubtedly imperfect measures, they do provide evidence of broad economic activity.  Li Keqiang cited them as measures he uses to judge economic activity as they are harder to fake because (wait for it), he believes GDP figures are so artificially manipulated.  As a final note, I fail to grasp how concerns over Chinese GDP qualify as a conspiracy given that we are being told this is a problem.

One writer makes the straw man argument that China has grown substantially over the years, so Chinese GDP data has to be “broadly accurate”. There are numerous problems with this specific argument.  No one who points to serious technical issues in GDP accounting has ever said China has not grown rapidly over a sustained period.  It is pure sophistry to create the illusion of disagreement hoping to overlook the real point for which they provide no defense.  China has grown rapidly over a sustained period, but that say absolutely nothing about the veracity of GDP data they are showing the world.  Furthermore, “broadly accurate” so vague for something that should be focused on detail and accuracy as to be irrelevant.  This is like me saying it is “broadly accurate” to say it is hot and there is snow in China.  They are both true and broadly accurate but provides me no usable information about when, how much, or to what degree.  There is still no serious defense of official Chinese GDP data.

Another point made by one of the Chinese GDP defenders is that if GDP data is manipulated, it would require fiddling with underlying data. There is only one problem with this point: we know that underlying data category after underlying data category is manipulated.  For more than a decade, Chinese unemployment spent most of its time bouncing between 4-4.2 percent.  Chinese economists became skeptical of the number and conducted a study estimating urban unemployment during their sample period reached 10.9 percent. Inflation data in China was understated by about 1 percent annually between 2000 and 2011.  Others focus on a miscalculation of the GDP deflator with regards to how imports and exports impact national accounting.  Chinese exports have been overstated by upwards of 30 percent, though in all fairness this is due primarily to the Chinese form of transfer pricing even if the government looks the other way. Additionally, the enormous discrepancy between underlying provincial GDP and national GDP is well noted, with only a few provinces reporting growth beneath the national average a statistical impossibility.  More recently, there are significant discrepancies between output of consumer products and retail sales to name but a few industry level statistical anomalies.  If commentators want to point out that manipulating GDP data would require manipulating underlying data, there are these and a variety of others to choose from.  One final point here.  We know that Chinese bureaucracy controls, manipulates, and hides all nature of information throughout the entire government apparatus.  Just this past week, China declared itself, and no I am not making this up, the world’s largest democracy.  It strains credibility to believe that the Chinese government acts throughout the state the way it does to manipulate data while simultaneously behaving like well meaning, earnest choir boys when the subject is economic data.

One other argument that has been made is that China is transitioning to a consumption and service sector economy. I have covered this point in greater detail at FT Alphaville where, in short, covering significant amounts of retail, consumer, and services sectors, I find no empirical evidence that growth in the sectors is growing anywhere close to what some people claim.  There simply is no empirical evidence that Chinese consumers and services are rapidly growing to transition the economy.  What is amazing is the proponents of this theory admit they have no actual data to support what they are saying.  One proponent, in trying to argue to China is transition to a consumption led model, actually writes “China’s transition to consumption-led growth is that there are no high frequency data to support the analysis.” Yet conversely somehow, the lack of data can conversely be used to argue in favor of a transition to consumption based economy?  If critics have it wrong and there is no data that we can use to estimate service and consumption growth, then the same is absolutely true for those who argue the opposite.

The last major flaw by proponents of Chinese GDP data is that they use official Chinese GDP and national accounting data to support their argument that official Chinese GDP and national accounting data is accurate. This is the peak in intellectual circular logic.  If the data or data producer is in question, you need to produce other data that supports your argument.  For instance, the service sector and consumption data cited comes from the same people who bring you the GDP data in question.  This is similar to arguing Enron’s profitability is accurate based upon their revenue.

The fundamental problem faced by defenders of Chinese GDP data is that they do not dig into official data and look at some of the enormous glaring problems. One defender relies heavily on World Bank data while another cites official topline Chinese data to defend official topline data.  Neither take the time to examine the glaring discrepancies.  According to official data, urban housing CPI from 2000 to 2011 was 6 percent total — that is not 6 percent annually but 6 percent total over 12 years during a period when GDP growth was averaging 9 percent or more and inflation was significantly higher.  If you update this the number becomes about 12 percent in total from 2000 to 2013.  Official data is essentially implying housing fell relative to income, wages, GDP, and pretty much everything.  Anyone with any knowledge of Chinese housing prices, not just real estate asset prices, knows that this number is pure fantasy.  However, not only is the explicit data clearly manipulated data but the underlying data is manipulated.  To produce total national housing CPI, the National Bureau of Statistics China (NBSC) created a weight between urban and rural areas.  According to the NBSC, urban areas received an implied weighting of 80 percent to benefit from the already once manipulated CPI data that would produce a better national number.  Now China is likely at least 20 years away from being an 80 percent urban country, and was much less in 2000.  The key issue here is that this was not a rounding error, miscalculation, or poor methodology, this was pure and simple fraudulent manipulation of statistics.  Some defenders have, in a point of concession, acknowledged there might be some statistical methodology issues but nothing else.  To anyone who believes this, if you publically declare that China was 80 percent urban in 2000 and every year since and that urban housing inflation has been approximately 10 percent since 2000, we can discuss anything you want.

China has undoubtedly grown significantly over the long run and this is unquestionably good for China and the world. However, that is not the question.  The question is how reliable Chinese GDP figures are.  I believe as a baseline case from my own research alone, real Chinese GDP would need to revised downward by a minimum of 10 percent or approximately US $1 trillion.  Add in other known problems and I believe the number could go as high as a downward revision of 30 percent of real GDP.  Think of it using a simple scenario: let’s assume every year since 2000 China has overstated GDP by 1 percent.  In other words, 10 percent is in reality 9 percent.  That would imply that today, China needs to revise current real GDP downwards by approximately 16 percent.  This would still mean that China has grown significantly but also, as a mountain of clear evidence indicates, Chinese GDP growth has been overstated. Finally, it is important to note that lots of little numbers are clearly off but all these little numbers add up to big changes, especially when added up over time.  Chinese GDP data is broadly accurate in that the Chinese economy has grown significantly over time.  However, accounting for the very real holes in the Chinese national accounting, it would appear to require downward revision of at least 10 percent and quite probably significantly higher.

I look forward to attending the meeting where American economists living in the United States sit down with the Premier of China and explain to him what is wrong with his views of Chinese GDP data.  That should be fun.

Christopher Balding

Associate professor at the HSBC Business School of Peking University Graduate School.