Lies, Damned Lies, and Chinese Statistics

Who’s cooking Beijing’s books?

On Wednesday, U.S. Treasury Secretary Jack Lew met with China's Premier Li Keqiang, a crucial first meeting between new representatives of the world's two biggest economic powers. Lew's interlocutor sits at the top of the world's second-largest economy -- a country whose GDP reached approximately $8.3 trillion in 2012. But how accurate are the statistics that illuminate China's growth? Even Li himself has said (as quoted in a U.S. State Department cable published by WikiLeaks) that China's GDP figures are "man-made" and therefore unreliable. In this excerpt from his book, Understanding China's Economic Indicators, Wall Street Journal China reporter Tom Orlik explains how to get to grips with China's data.

Americans seem to think that the production of China's economic data is a crude political farce: the controlling hand of the Communist Party intervening arbitrarily to direct the level of key indicators before they are published. In the past, that image was not too far from reality.

In the 1958-1961 Great Leap Forward, Chairman Mao's disastrous attempt to shift a backward agrarian economy to a modern industrial powerhouse, the failure of the statistical system contributed to catastrophe on a grand scale. Mao's plan, such as it was, required producing an agricultural surplus that could be sold to fund investment in a modern industrial base. Whipped into a patriotic frenzy, and knowing that their future depended on meeting unrealistic targets for the production of grain, local officials engaged in rampant exaggeration of output.

But reality was distorted at a cost. The higher the production figures, the greater the tax owed to the central government. In some areas, the exaggerated claims were so great that the entire harvest had to be handed over as tax, used to fund investments and extravagances that China could ill afford. In some parts of the country, the only crops left behind were grown by villagers in secret locations, away from the acquisitive eye of the local production teams. But such success stories were few and far between. Tens of millions died in history's greatest man-made famine.

Some things have stayed the same in the last 50 years, but a lot has changed. At its root, the cause of over-reporting output during the Great Leap Forward was the divided loyalties of local officials, torn between the reality of stubbornly unchanging grain yield and career ambitions that depended on meeting unrealistic targets for output.

That conflict of interest was slow to be resolved. The biggest reform-era controversy over China's economic data, a GDP growth figure for 1998 that many experts regard as grossly inflated, has been laid at the door of the exaggerated claims made by local officials. But the National Bureau of Statistics (NBS) -- the arm of the government that manages China's data system -- no longer relies on the unreliable inputs it receives from local bureaus. Across the range of key industrial output, fixed asset investment, and retail sales data, the largest enterprises in the country report directly to the NBS in Beijing.

Where there is a conflict between local and national data, the NBS typically resolves it in favor of the reliable national figures. The national GDP data announced every year by the NBS, for example, is consistently below the sum of the GDP reported by the provinces. That's often seen as a sign that there's something rotten with China's data, but in fact, it's evidence that the NBS has taken steps to free national data from the influence of local exaggeration.

The second problem that bedeviled the grain data during the Great Leap Forward was the belief that boosting morale through exaggerated claims was more important than reporting reality. The audience for China's economic data might have expanded beyond the agricultural workers of the 1950s, but the numbers continue to play a role at home and abroad in buoying confidence in the China growth story. The magic 8 percent target for growth, which China maintained for many years before downshifting to 7.5 percent in 2012, had an almost talismanic significance.

If the government is ever tempted to play fast and loose with the statistical reality, though, there are also forces pulling in the other direction. The Information Age has reduced the scope for the use of economic data as an instrument of propaganda. Official numbers are available instantly around the world over the Internet. A horde of sophisticated and cynical journalists, spreadsheet-wielding economists, and hard-nosed investors are following every hiccup in the Chinese economy.

Measuring a rapidly changing economy remains a challenge. One of the problems of the Great Leap Forward was that China's leaders were blinded by a belief in their own hocus-pocus technology. Mao may have genuinely believed that revolutionary fervor plus new planting techniques could result in massive increases in grain output. Changes in production techniques made it more difficult to measure output, or at least obscured for a time the fact that output was little changed.

The dislocations of reform-era China are less wrenching than those of the 1950s, but the mainland is still changing fast. The economy is many times larger today than it was in 1978, new sectors like e-commerce are driving increases in output and employment, new products are entering consumers' shopping baskets, and new property is coming online in the housing market. To keep track of GDP, the NBS has expanded its survey from a primitive 16 sectors to a more respectable 94, and has significantly improved its coverage of the services -- where areas like private education and health care are playing a new and important role in the economy.

But in other areas, surveying tools and techniques have been slow to adapt to a changing reality. Consider China's creaking system for measuring developments in labor markets. In 1978, 100 percent of the workforce was employed in the state sector, and a survey based on state-owned enterprises worked well enough to track changes in wages. Many more workers have private-sector jobs now, however, so a wage data survey that continues to focus on a privileged subset of state-sector workers makes little sense. Survey tools that lag behind the reality of a changing China are a more serious problem for China's economic data than political interference.

A recalcitrant population continues to add to the problems. The NBS doesn't provoke the same kind of anxiety as the Public Security Bureau, or the State Administration of Taxation. But a public culture of deceit when it comes to dealing with officials of any kind makes it difficult for the NBS to collect solid baseline information. In the Great Leap Forward, peasants growing crops outside the greedy gaze of the local production team distorted the data. Fifty years later, the problem is small businesses that keep three sets of books -- one for the taxman, one for investors, and one for themselves -- or rich households that refuse to disclose the income they receive from graft. But the problem of a sample set that is incapable of telling the truth to anyone in an official badge remains, and that adds to the difficulties the NBS faces.

Finally, the NBS and other arms of the government charged with the production of China's economic data do themselves no favors by treating straightforward information on methodology with a degree of secrecy more suited to guarding the location of nuclear weapon silos. Transparency on the methodology underpinning key data points has improved considerably from the situation a few years ago. In 2010, for example, the results of a new effort to measure wages in the private sector were published alongside details of the survey approach and a discussion of some of its limitations. But crucial details of the methodology on key indicators are still kept hidden. By withholding key details of how the official data is calculated, the NBS and other institutions raise doubts, perhaps unnecessarily, about its reliability.

The reality of China's official data today is not the crude controlling hand of the Politburo dictating the GDP growth figure. It is an increasingly reliable and comprehensive set of economic indicators that remain compromised in some areas by the difficulty of measuring a rapidly changing economy, imperfect surveying methods, a recalcitrant sample set (the Chinese public), and continued political sensitivity. The system is not perfect. But neither is it a farce.



Hugo's Banker

How China propped up Chávez.

Hugo Chávez, resplendent in crisply pressed fatigues and paratrooper boots with red shoelaces, had a very special guest. Meeting him that day in mid-September 2011 in Caracas was the world's most powerful banker, who had lent Chávez's government at least $40 billion over the four years from 2008 to 2012, or about $1,400 for every man, woman, and child in Venezuela.

The guest, stooped and looking older than his 66 years, drank chrysanthemum tea, staring across the table at Chávez, bald from his chemotherapy treatments. He handed the Venezuelan president a 600-page book filled with recommendations on how Chávez should run, manage, and build ports, roads, and railroads.

What bank in this day and age can lend so much money to one of the world's riskiest regimes, a country with two centuries of credit defaults, and then tell its debtor how to spend the proceeds of the loan?

Not Goldman Sachs. Chávez's banker had governmental ties that the legendary New York firm, incubator to former U.S. Treasury secretaries Hank Paulson and Robert Rubin, could only dream of. The man sitting across from Chávez was the Chinese equivalent of royalty. His father was one of the founding fathers of the People's Republic of China.

Not the World Bank. That Washington-based product of Pax Americana had a loan book only a fraction of the size of this man's company, the world's biggest policy bank. Chávez's Chinese bank had bragging rights over the World Bank as well, having helped craft the biggest and arguably most successful poverty-reduction program in history, which saw hundreds of millions of Chinese peasants become middle-class city dwellers. The bank has funneled billions of dollars into Africa, stoking Ethiopian exports and reviving Ghana's railroad network after decades of neglect.

Not the Fed. The U.S. Federal Reserve might have trillions of dollars at its disposal, and it might have staved off a depression in the wake of the 2008 financial meltdown. But when it comes to results, Chávez's bank arguably had an even more impressive record: It devised a system to fund local infrastructure projects that helped China sail through the global financial crisis while the United States and Europe stumbled.

Chávez's guest was Chen Yuan, chairman of China Development Bank (CDB) and the world's most powerful banker. You can't buy shares in CDB; it is wholly owned by the Chinese government. But it would be a mistake to call it a government bureaucracy that is at the state's beck and call. It is a bank, claiming the lowest nonperforming-loan rate of any major Chinese lender and having a reputation for hardball negotiations with both domestic and foreign clients. While other low- to middle-income countries have development banks that help fund their national companies and bolster economic growth to catch up to more advanced powers, the scale of CDB and the amount it can lend make it a different animal.

But the world's most powerful bank? Yes. Let us count the ways.

Exhibit 1: China. CDB wrote the manual for the biggest economic and urbanization boom in history, pioneering a system of lending to local government-backed companies that funneled more than $2 trillion across China to build roads, bridges, subways, and stadiums. The turnkey financing system it set up, beginning in 1998 in Anhui province, meant that Chinese growth barely hiccupped while the United States went into the deepest economic crisis since the Great Depression. CDB's recently retired vice governor, Gao Jian, is regarded as the father of China's bond market, now Asia's largest and a growing source of funding for Chinese companies. CDB in one year sold more bonds than China's Finance Ministry, an indication of how easy it is for the bank to access large sums of money in China's financial system.

Exhibit 2: Africa. China has lent more to Africa since 2001 than the World Bank, and CDB's lending is focused on building industry and infrastructure for the next stage of Africa's growth and harnessing its biggest clients, China's elite state-owned companies, to do much of the work. While much of Chinese lending in Africa focuses on the extraction of oil and metals to fuel China's insatiable thirst for raw materials (driven in part by the bank's funding of China's urbanization), that is only part of the story. The bank's private-equity arm, the China-Africa Development Fund, is spurring the continent's manufacturing as labor costs rise at home, helping transform Ethiopia into an exporter of leather and helping Chinese companies such as Chery Automobile open factories. In Ghana, CDB provided a $3 billion loan -- that country's largest ever -- to finance roads, railroads, and an oil terminal and pipeline network. The loan mandates that 60 percent of the money must go to Chinese companies in the form of contracts, guaranteeing Chinese companies will be the big winners.

Exhibit 3: Latin America. CDB's massive, unprecedented lending to Chávez's government has helped secure access for its state-owned oil companies to long-term supply in the competitive global oil market as China's demand continues to rise. CDB client Citic Group, China's largest state-owned investment company, has provided railroads and housing complexes; its client Sinohydro Group, the state-owned hydropower behemoth, has built power stations.

It has also been good business for a host of Chinese companies. Chen's point man for Venezuela is a rail-thin man named Liu Kegu, with the buzz cut and booming voice of a Marine Corps gunnery sergeant. Chávez affectionately called him "brother." A decade ago, Li worked under Bo Xilai, the disgraced former Chongqing Communist Party boss who is now awaiting trial for his role in his wife's murder of a British businessman. The Venezuelan opposition frets that Chinese influence is eroding the country's sovereignty and drawing it into a risky alliance of dependence. U.S. companies such as ExxonMobil played the role of bogeymen of 20th-century Yanqui imperialism; CDB might take that role for China.

Exhibit 4: Clean energy and telecommunications. CDB has funneled more than $92.4 billion of credit to China's leading wind, solar, and telecommunications companies, which have used the cash to overwhelm global competitors, securing loans because lenders know the companies have the backing of the world's most powerful bank. Huawei, the Chinese company that is the world's largest telecommunications equipment-maker, is also the biggest single recipient of these credit lines -- to the tune of $30 billion. It has used CDB credit to help its vendors in Latin America, Africa, Asia, and Europe buy its gear. In 2009, Mexico City-based América Móvil, Latin America's largest mobile-phone carrier, was seeking $1 billion to upgrade its mobile network -- and chose CDB. Chinese solar-energy companies continue to ramp up production even as losses mount, backed by CDB lines of credit that dwarf the U.S. government's loans to the now-bankrupt Solyndra. The CDB loans are helping to cement Chinese domination in an industry of the future and helping to drive U.S. and European companies to insolvency. Many Chinese companies have debt loads and quarterly losses that should have driven them to bankruptcy as well, but for the CDB loans.

The danger for China? Local resentment over Chinese loans, such as in a post-Chávez Venezuela, will lead to demands for renegotiation or even default. If that happens, it will be an expensive lesson for a rising financial power.

AFP/Getty Images