PrintStudy: China inflates its GDP by 12%
A carefully researched study by economists at the Brookings Institute estimates that the Chinese government inflates its gross domestic product by about 12%.
The reason this is important is that even with the Chinese overestimating their national wealth, they still have a huge economy. And the current downturn in economic growth in China threatens to hurl the world into a serious recession.
Since China managed to weather the fallout from the financial crisis without registering much of a slowdown in its "official" GDP figures, playing "guess the real growth rate" has become one of the most popular parlor games among the professional economist set. Whereas the stakes are much higher for academics on the mainland (one of whom was censored and threatened by government thugs after speculating that GDP growth on the mainland might be closer to 2%), researchers at American think tanks have freely offered estimates ranging from 2% to 4% (which, admittedly, would still put China well ahead of the US).
But as investors and economists once again cast a wary eye toward China as signs of flagging growth are once again threatening to sink the whole world into a recession, a team of researchers from the Brookings Institute has published a carefully researched paper detailing the exact mechanism by which authorities in Beijing inflate the country's GDP figures, while estimating that China's economy is roughly 12% smaller than the official figures would suggest. Brookings published the paper on Thursday, just two days after Party leaders at the annual National Party Congress lowered their economic growth forecast to between 6% and 6.5% of GDP.
Though the paper focused on the period between 2008 and 2016, it's the latest evidence that China's economic slowdown has been more severe than believed, and that the growth rate from last year — China's worst since the early 1990s — might, in reality, be just under 6% (compared with 6.6%).
Inflating economic statistics is an old commie trick going back 100 years to the days of Lenin. Low-level bureaucrats at the local level inflate production numbers to make their regional bosses happy. The regional bosses inflate the numbers to make national party leaders happy. By the time the numbers are publicized, they are laughably overblown.
According to Brookings, much of the manipulation in Chinese official government statistics takes place at the local level. In what the FT described as "a legacy of Maoist state planning", authorities in Beijing hand down growth targets to local officials, who use it to goalseek the official statistics they hand back.
"China's national accounts are based on data collected by local governments. However, since local governments are rewarded for meeting growth and investment targets, they have an incentive to skew local statistics. China's National Bureau of Statistics (NBS) adjusts the data provided by local governments to calculate GDP at the national level," the study's authors said.
Evidence of this is relatively obvious: Year after year, the sum total of China's provincial growth figures is larger than the unadjusted national figures reported by Beijing. Though central authorities accused three provinces of doctoring their data back in 2017, authorities have done little else to discourage the practice.
There are a lot of people who think Brookings is lowballing the number-fudging. Some estimates put the actual GDP number at 50% of the "official" number.
In a speech in Shanghai this week, Michael Pettis, professor of finance at Peking University, warned that China's debt is closely linked to the government's perceived overstatement of its gross domestic product (GDP).
The government is accused of perpetuating the existence of "zombie companies", by granting loss-making companies loans. Banks in turn treat these companies as creditworthy, whereas in reality they should be written off as bad debt, Pettis said.
"If you believe there is bad debt that has not been sufficiently written down, you must believe that China's GDP is overstated, relative to what it would be in any other country. That must be true," Pettis said.
"If we are able to calculate GDP correctly, it would probably be half of the recorded number."
"Zombie companies," indeed.
China is experiencing a significant downturn. Exports have fallen 21% in the last year, and the government refuses to devalue the renminbi, fearing a run on its currency. This will probably lead to a continued fall in exports which threatens global stability.
If people can't rely on the accuracy of economic numbers coming from the Chinese government, that lack of confidence will effect everything from the global monetary system to public policy. We might fall into a real recession because of fake Chinese numbers. While there are some efforts by the Chinese to reform this practice, it's generally believed that it's too little and maybe too late.
