View: If it is too good to be true, it probably isn't always - China's economic statistics

This article is contributed by a kind reader of JC Economics Essays

For many economists and pundits who long believed that China’s incredible provincial and national economic growth figures seemed too good and neat to be accurate, they now have reliable confirmation of their scepticism. While long dismissed as speculation or myth, there is now official news confirming their suspicions. 

What happened?

In 2017, the Chinese government finally admitted that some of its outstanding economic data was made up… which means that some of the economic figures were invented, created, man-made.

Before these shocking revelations, there had been many suspicions: an economic study by Harry X Wu in June 2015 estimated that from 1978 to 2012, China’s Gross Domestic Product (GDP) grew by 7.6%, which would be around 2.6% lower than the official 9.8% economic figure. Perhaps he got closer to the truth than we realise. In fact, it might have been interesting to note that Wu’s (2014) results indicated that Chinese Total Factor Productivity (TFP) growth was negative from 2007 to 2012. Over-building, over-capacity, under-utilisation, and the advance of the Chinese state into private sector markets were also substantially dragging China’s economic growth down.

Yet, despite this doom and gloom in the economic analysis, and the many suspicions, it was reported cheerily in official news that China’s economy expanded by 6.7% in the third quarter of 2016. Economists have sometimes wondered why China’s economic growth figures often look right on track to hit the central government’s target economic growth rates.

And in January 2017, China’s northeastern Liaoning province, which relies on the production of steel as its economic growth engine, reportedly inflated its economic growth figures from 2011 to 2014. 

The sheer scale of this economic deception is quite staggering. This province has a population of about 43 million, which makes it bigger than California in the USA. And this is the first time the Chinese government has publicly admitted to faking official economic statistics at any level. 

Also, what makes this economic case even more surprising is that fiscal revenues in Liaoning were inflated by at least 20% during the same period, and some other economic data there were also fabricated. These actions can be partly attributed to the incentives that rational and utility-maximising Chinese officials face when it comes to economic data. It is said (in Chinese) that Chinese officials produce the economic numbers, and the economic numbers produce officials in turn, which means that massaging economic data can help one get ahead in Chinese officialdom. People respond to economic incentives.

It can be quite breath-taking to think that the economic books are cooked. Some of the faked economic figures are in fact quite dramatic. According to the news agency Reuters, one county in Liaoning province reported an extra fiscal revenue of 847 million yuan (around US$131.3 million) in 2013, more than double the actual figure. And in one of the years, Liaoning’s GDP growth figures were reported at 9.5%, far above the current figure of a mere 2.7%. A pittance! 

And Liaoning had failed to hit government economic targets in key economic metrics in 2016, including economic growth, fixed asset investment, and exports. Since 2014, when Liaoning stopped inflating its economic growth figures, fixed asset investment, an important proxy measure of construction work, had been declining 60% to 70% per annum.

In China today, the falsification of local economic statistics apparently still happens in some areas from time to time, and the government will occasionally issue stern warnings of heavy punishment for those who fake official economic figures. Enforcement seems to remain an issue for China as it continues its economic rise. There are many economic implications: Investors may have to think twice about investing in China; their economic figures have to be taken with a pinch of salt; and most importantly, and surely not just tongue in cheek, there should be many, many jobs for real statisticians in China. 


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