More Fraud Exposed In Chinese Official Econ Data

For years it has been common knowledge that China takes delight in cooking its economic books. Perhaps the most notorious example is the long-standing problem with the country’s GDP figures, where the combined provincial figures do not tally with the National Bureau Of Statistics' national total (we discussed this most recently in "Data Fraud At Chinese Province Suggests Local GDP Numbers As Much As 20% "Overcooked").

And while to Beijing painting the economy in a perpetually favorable light - China's GDP is notoriously the least volatile of all economic metrics - the calculations by China's National Bureau of Statistics are vital for understanding and shaping policy towards the world’s second largest economy, including the basis on which it can be described as such.

"In an authoritarian system there is definitely an incentive for statistics officials to publish data that will please the government. At the same time, however, economic policy that is based on unreliable data can only be deficient and thus leads to outcomes that will not please the government,” said Carsten Holz, professor of economics from the Hong Kong University of Science and Technology, who has closely studied Chinese statistics for years.

Now a new set of concerns about "cooked" numbers has emerged and it centers on areas such as profits from large industrial companies, retail sales, electricity consumption, coal output, and company revenues in cultural and related industries.

Here, as SCMP reports, one of the "perplexing" issues is that the NBS has traditionally reported positive year-on-year growth rates in percentage terms, while growth in absolute yuan terms has been negative. This deviation, which barely happened in the past, has reinforced scepticism over the quality of the "data" and fuelled the suspicion that the NBS generates data outcomes that match the policy goals of the Chinese government leadership.

For example, in July, profits from industrial enterprises with more than 20 million yuan (US$2.9 million) in revenues rose 16.2% Y/Y, according to the NBS. But comparing this year’s absolute yuan levels with last year’s, profits dropped by 15.92%, according to calculations by the South China Morning Post. The data makes no sense on either a snapshot or total basis, as cumulatively, the profits grew 17.1% year on year in the first seven months, according to the official data, but fell 8.1 % in absolute terms.

In footnotes in its data report, the NBS explained that it only compared firms that were included in the data sample both this year and the same time last year. The bureau adjusts its sample periodically during the year, adding or deleting companies depending on whether they rise above or fall below the minimum revenue threshold. In the most glaring example of how to report "Non-GAAP" economic data, Chinese firms that are in only one sample appear to have been stripped out of the calculation, though the revisions in the samples used are not made public.

At the end of 2016, the number of industrial firms with revenues above the threshold stood close to 400,000. And yet, at the end of June, the NBS sample contained 59,000 companies as opposed to 54,000 during the same period last year.

Here too we find the same fudge: these companies' operating revenues rose by 9.9% Y/Y officially but dropped by 3% in absolute terms.

Such methodology has drawn scorn from some observers for having special “Chinese characteristics” that are not used in other major countries.

And while it is no secret that Chinese economic data are notoriously manipulated, at least in the past Beijing has taken measures to avoid public examples of "two sets of books" showing different results.  One China economist close to the NBS told the SCMP there has been an internal debate over the clarification of data discrepancies.

Hardly surprising, the economist said it was very likely the NBS lowered last year’s base figures to make this year’s profit growth rate from industrial firms higher in percentage terms, the economist said. The revisions form part of a campaign to clean false data from local authorities, who have been inclined to inflate figures to gain more fiscal support from the central government.

Based on calculations by the Post, the provinces and regions that inflated their industrial profit data by more than 30% last year include Tianjin, Hebei, Inner Mongolia, Jilin, Jiangxi, Shandong, and Guangxi. The result is hardly surprising because some of those provinces in question had already been exposed for forging data. For example, the Binhai New Area, an economic zone in Tianjin, was exposed for having inflated its 2016 GDP growth by a third.

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Another example of the NBS "cleaning up" local data is the plunging growth of fixed-asset investment (FAI), which until recently was the biggest part of China's GDP. During the first seven months of this year, figures show investment by state-controlled firms and private ones increased by 1.5 per cent and 8.8 per cent respectively, compared to 10 per cent and 6 per cent for the whole year of 2017.

“How can the partial year 2018 data have such an extreme flip compared to 2017? It is not credible that state FAI is growing at only one-sixth the pace of the private one, the lowest ratio ever, especially when the press is filled with stories on the difficulties of private firms getting bank loans,” Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics, said.

“For the FAI data, they are beginning to wring out some of the vast overstatement of capital formation so the per cent change reported most recently is calculated against a prior number that has been adjusted.”

As we reported at the time, a 2015 study from the Rhodium Group found that because of different data reporting systems, local authorities tended to overstate growth, which it turn made the central government adjust its national calculations in an attempt to factor this in.

Anecdotally, in the past the NBS has tried different ways of containing local data misreporting, such as embedding tracking chips in excavators and other construction equipment to measure their operating times, which can be compared with reported data on construction activity.

But it's not just local government fabricating their output to Beijing: even inside the NBS, there is a mistrust of the data generated by different departments. According to the 2015 Rhodium study, the department that calculates the headline figures does not trust the information provided by its own industrial statistics department, which compiles data directly reported by individual firms.

“The statistical system is target-driven, so if consumer spending is targeted to grow at 10 per cent, say, then the statistics collectors make adjustments in order to reach 10 per cent.

“That might [cause the NBS to] change the number of companies being sampled, change the standards for inclusion in the samples, or even (in a case we ran into) call companies and suggest that they reduce last year’s numbers to create a more attractive comparison,” Anne Stevenson-Yang, co-founder of J Capital Research said.

In short: China's data has long been goalseeked to be whatever "someone" in Beijing orders it to be.

Aware of this, economists have resorted to other indicators, such as monitoring satellite images of the intensity of artificial night lights or rises and fall in energy consumption, to monitor the country’s economic activity.

Amazingly, even this data is now being gamed: last month, China’s National Energy Administration said the country’s primary industry (the official term for the agriculture sector) used 6.5 billion kilowatt-hours of electricity in June, an increase of 6.6 per cent from the same month in 2017. But compared with the figures reported last June, that represented a drop of about 46 per cent.

Caught lying and in the face of intense public suspicion, the agency later admitted that its calculations were based on a lower figure for last year, which excluded some support services based on a new definition of the agricultural sector.

It is the lack of transparency into data calculation methodology that most annoys economists. While NBS chief Ning now says China’s official data is comparable to that of other countries, its reporting standards have yet to catch up with global standards. In short, when it comes to the economic data meant to validate the "second biggest economy" in the world, China is nothing more than a banana republic.

Of course, the simplest solution would be for China to adopt apples to apples proforma numbers, using the old methodology to represent a given data point, something which other nations like the US do. “Indeed the US economy is less volatile than China’s and its local data is more accurate,” the economist close to the NBS said.

The economist said this raised the question why the NBS could not disclose its margin of error or release two sets of data using both the old and new methodology.

“I have repeatedly asked them about this, and they say they can’t. I asked why. They said ‘why invite confusion as it would take lots of effort to explain to laymen why you published two numbers?’.

Indeed, why admit you lied?