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%).
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.
Inflated data in hand, China's National Bureau of Statistics struggles to adjust it, and though readings before 2008 were reportedly more accurate, more recently, the figures have been further off the mark, according to Brookings.
"NBS has done a lot of work to weed out the fake numbers added by local government, but it just doesn’t have enough power and capacity, nor the right incentives," Michael Zheng Song, economics professor at the Chinese University of Hong Kong and a co-author of the paper, told the FT. "It would be unfair to blame NBS for fabricating GDP numbers."
So, now that we've once again affirmed what many have widely suspected, what does this mean for US-China trade talks? Well, it would seem to confirm the argument made by an FT columnist earlier this week that President Xi has just as much to lose from a failed trade deal as President Trump.
Here are a few other conclusions from the paper:
- Official data overstated growth of nominal GDP by an average of 1.7% per year between 2008 and 2016
- This made the economy 12% smaller in 2016 than figured indicated
- GDP growth in real terms was overstated by 2% over the same period
- The paper's authors are more confident about GDP data in nominal terms versus real terms
- Overstatement of industrial and investment output were the most severe
- Data on consumption was found to be the most reliable
But with authorities anxious to suppress any information that would contradict their economic narrative, we now wait to see whether Beijing will declare former Fed Chair and Brookings Institute economist Ben Bernanke (along with the study's authors) 'persona non grata'.