AN ABERRANT ABACUS
Gauging the reliability of China’s dodgy economic statistics.
From The Economist

As China’s importance in the global economy increases, investors are paying more attention to its economic numbers. Yet the country’s official statistics are notoriously ropy. Some commentators accuse China’s government of overstating GDP growth for political reasons, others complain that the official inflation rate is fraudulently low. So which data can you trust?

One reason to be suspicious of GDP figures is that China is always one of the first countries to report them, usually only two weeks after the end of each quarter. Most developed economies take between four and six weeks to produce them.

Amazingly, most economists reckon that China has understated its growth in recent years. The country’s National Bureau of Statistics has recently revised China’s GDP growth up by half a percentage point for both 2006 and 2007, to 11.6 percent and 11.9 percent respectively, thanks to stronger growth in services, which government statisticians find harder to count than industry. Yet even these revised numbers may be conservative.

Chinese provinces independently report GDP, and a weighted average of their figures consistently gives higher rates of output and growth than those reported by the central government. True, local officials have an incentive to inflate growth numbers because promotion depends upon economic performance; however, experience suggests that number crunchers in local governments are more accurate than Beijing’s. For instance, the figures first published for 2004 showed that the sum of the provincial GDPs was 19 percent bigger than the reported national figure. Lo and behold, in 2005, after a national economic census picked up more services, the NBS revised its GDP up by 17 percent; it also lifted the annual growth rate over the previous decade.

Stephen Green, an economist at Standard Chartered, calculates that in 2007 the combined output of the provinces was 10 percent more than that reported by Beijing. Their average growth rate of 13.1 percent was also still 1.2 percentage points higher than the revised national growth rate, although the gap has narrowed from almost three points in 2005. Perhaps, suggests Green, central NBS folk have decided that they should trust their local counterparts more. But just as local officials have an incentive to inflate numbers, so Beijing has had reason recently to understate them—it wants to slow the red-hot economy. China’s true GDP growth may therefore be higher still, which may appear to add to fears of overheating.

Goldman Sachs ranks the reliability of other Chinese statistics. The closely watched figures for fixed-asset investment are among the least reliable. They include purchases of land, which only reflect changes in ownership, not an increase in capacity or value added. Rising land prices in recent years have therefore led to a big overstatement of the level and the growth of investment. In contrast, consumer spending is almost certainly much higher and growing faster than official figures suggest. Retail sales are often used as a proxy for private consumption, but they exclude services, the fastest-growing slice of household budgets.

China’s true inflation rate is probably also higher than the consumer-price index reports. One problem is that the CPI appears to be based on the prices of state-provided health, transport, and education while ignoring their increasingly important private counterparts. Data for 36 cities collected by the National Development and Reform Commission show that inflation for medical care and education has been running at 5-10 percent since 2001, well above the 1-2 percent reported in the CPI. However, even if the official measure understates inflation, the changes in it may still be a fair gauge over time. Goldman Sachs therefore ranks it relatively high in terms of reliability.