I’ve been saying this for years now: China’s official GDP and associated economic numbers are just not reliable:
A senior Chinese official said in 2007 that much of the country’s local economic data are unreliable, according to a leaked diplomatic cable published by the WikiLeaks website.
The official, Li Keqiang, was at the time Communist Party secretary of the northeastern province of Liaoning, and has since been promoted to vice premier. Since landing that position, he has overseen many of the central government’s efforts to improve the quality of its economic statistics, which continue to face many questions over their accuracy and consistency.
[. . .]
China’s Foreign Ministry has said it will not comment on the content of the diplomatic cables published by WikiLeaks. The leaked cable reports comments Mr. Li made in a dinner in Beijing with then-U.S. Ambassador Clark Randt on March 12, 2007. His remarks focused on the challenges of administering the province of Liaoning, which because of its legacy of failed state-owned enterprises was burdened with a large number of unemployed workers.
“When evaluating Liaoning’s economy, he focuses on three figures: 1) electricity consumption, which was up 10% in Liaoning last year; 2) volume of rail cargo, which is fairly accurate because fees are charged for each unit of weight; and 3) amount of loans disbursed, which also tends to be accurate given the interest fees charged,” the cable says.
“By looking at these three figures, Li said he can measure with relative accuracy the speed of economic growth. All other figures, especially GDP statistics, are ‘for reference only,’ he said smiling,” the cable reads. “GDP figures are ‘man-made’ and therefore unreliable,” the cable paraphrases Mr. Li as saying.
As I said back in February, the reason for the made up numbers is inherent in the Chinese system:
In this way, the PLA stopped being just the customer/end user. They cut out the middleman and absorbed the entire supply chain. The PLA became a significant economic player in the Chinese industrial economy . . . and this is still true today. The generals aren’t formally in charge, but they own the companies that do military production.
So what? So let’s look at how a civilian corporation’s incentives differ from one owned directly by the army. In a civilian corporation, the CEO runs the business with an eye to generating the largest profit possible while staying (for the most part) within the law. A CEO who deviates from this to ride a favourite hobby horse will eventually face the wrath of the stockholders who want that maximized profit. There are natural limits on how much freedom to invest in uneconomic activity any CEO will be given. Sensible stockholders don’t try to micromanage the firm, but do raise questions if too much of the company’s efforts are devoted to things clearly not related to the company’s long term benefit. Company accounts can be rigged, for a time, to show misleading results, but eventually (Enron, Worldcom, etc.) the truth will out.
A Chinese firm that’s owned by the army? Profit may be nice, but the “CEO” reports to a different master: the guys with the guns. The company accounts will show exactly what the guys with the guns want them to show . . . and the oversight and auditing committee members carry submachine guns. You’re told that your target is 10% growth? Don’t you think that the reported result will be at least 10%? Because your life may depend on the reported results being acceptable.
As my former virtual landlord says, this is one of my hobbyhorses:
- August, 2004 – Rant: “The Chinese Economy”
- October, 2004 – More Economic Voodoo — or is that Feng Shui?
- April, 2007 – The Chinese economy
- May 2008 – Those untrustworthy Chinese economic numbers
- January, 2009 – China’s economic situation
- May, 2009 – Official Chinese statistics
- November, 2009 – Contrarian investment strategy: short Chinese stocks
- February, 2010 – Crying “Wolf!” about China
- March, 2010 – Superbubble?
