China's economic data are (still) not credible

Chinatoday announced that GDP growth for 2011 slowed to 9.2 percent. Over the next days and weeks, there will be a stream of pontificating about what this means. There's a good chance that everyone involved will be pontificating about nonsense.

China's economic statistics are usually inconsistent, occasionally wildly inconsistent, and do not seem to be improving in quality. For 2011 GDP in particular, Beijing is very likely exaggerating growth (some years it understates). Rather than focusing on reported figures, the U.S. should prepare for a weak Chinese economy but one that may begin to rebalance in 2012. It should also engage in long-overdue independent estimation of China's performance.

Impeaching The Growth Result

There is a cottage industry that gains directly or indirectly from insisting that Chinese numbers are fairly accurate and far better than the bad old days of 15 years ago. But reasons for skepticism abound.

On one side are 9.2 percent growth last year and 10.4 percent in 2010. On the other is evidence of a far sharper slowdown. Auto sales, for example, plunged to 2.5 percent growth last year from 32 percent growth in 2010. There are also figures which can be corroborated with foreign partners. More than four-fifths of China's shipbuilding tonnage is for export. New ship orders plummeted 52 percent outright in 2011. Growth in imports of crude oil slipped to 6 percent growth last year from 17.5 percent in 2010.

There are indirect indicators of much slower GDP. Monetary policy has long been extremely loose, featuring negative real interest rates. Yet the central government began loosening further several months ago, a strange reaction to growth still over 9 percent. China still boasts the world's largest foreign trade surplus and net inward investment. Foreign exchange reserves fell in the fourth quarter, suggesting capital flight. That would translate to a sluggish world economy being more attractive than China's own.

Premier Skeptics

Problems go well beyond 2011 GDP. It has been over a decade since former Premier Zhu Rongji wondered how all provinces could grow faster than the country as a whole. The problem persists and, in fact, was worse in 2011 than 2008. The trends in national and provincial growth clearly match, but provinces remain unwilling to report accurate numbers. Such unwillingness extends deeply into Chinese statistics.

Li Keqiang, himself set to become premier in 2012, once dismissed GDP figures as "man-made." A serial revision process was intended to improve that data quality. There has never been a downward GDP revision, though, which indicates more unwillingness to report certain results. Further, only some data are revised, creating a mismatch between revised and unrevised elements. The revision process is indeed man-made and may have worsened data quality.

Some Chinese figures are so absurd they do not require a premier to doubt them. There is no pretense of a true unemployment rate, instead only "registered urban unemployed," a number not allowed to exceed 5 percent. It is considered too dangerous to announce true urban joblessness, much less the far higher rural number.

With GDP and unemployment, the third pillar of macroeconomics is inflation. The consumer price index rose 5.4 percent last year. The implicit GDP deflator – the gap between the arithmetic rise in GDP and announced real growth – was 8.3 percent. The GDP deflator fluctuates more widely than the consumer index and the latter is acknowledged by the government to have flaws. But price instability is considered sensitive. If political imperatives prevent release of better inflation numbers, any reasonable unemployment figure, useful revisions, or sensible provincial series, why accept the smoothest growth profile for any developing economy in history?

It should be emphasized that many problems in Chinese data are due to foreign observers. The Ministry of Commerce identifies Hong Kong as the source of 60 percent of incoming foreign direct investment (FDI) in 2011, soaring from an already substantial 35 percent in 2007. Calling investment from Hong Kong "foreign" strains credulity, especially with so many mainland subsidiaries that are listed in Hong Kong and sending money back. Yet it is duly repeated that FDI is rising.