China’s Economic Numbers Have a Credibility Problem

Suspicions that the country is cooking the books persist despite a government crackdown on cheating cadres.
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China’s gross domestic product grew 6.8 percent in the first quarter, smack on its pace in the preceding quarter, which was unchanged from the quarter before that. It’s a well-established pattern: Since 2015, China’s quarterly growth figures haven’t varied by more than 0.1 percentage point on a year-on-year basis. That contrasts with the U.S., where swings of a full percentage point from quarter to quarter aren’t uncommon.

Getting an accurate read on the world’s second-largest economy has never been more important. China supplied around one-third of global growth in 2017, up from 18 percent in 2007, according to Bloomberg calculations. That means an economist working at the Reserve Bank of Australia in Sydney and a number cruncher in the sales department at Vale SA, the giant iron ore exporter based in Rio de Janeiro, both need Chinese data to help generate their forecasts. And with officials in Beijing promising to open the nation’s financial markets to the outside world, the ranks of investors who rely on this information are bound to grow.

China's Share of World GDP Growth

Data: International Monetary Fund

Note: China's economy grew in 2009, but the world's contracted.

The world has long suspected that China fudges its numbers, which is why the investment community has assembled an array of alternative measures, including rail cargo volume, electricity use, and satellite imagery of factory sites, to gauge economic output. “I suggest investors ignore China’s GDP growth rate,” says Andy Rothman, a former U.S. diplomat in Beijing who’s now an investment strategist at Matthews Asia, a money manager. “There are so many other data points which help us understand the health of the Chinese economy and which we can verify by comparison with private data.” High-frequency metrics on movie ticket sales, iron ore imports, and orders for bulldozers are considered a more useful measure of demand in key sectors from consumption to construction. Bloomberg Economics’ monthly growth tracker, which shows more variability than the official GDP number, registered growth of 6.97 percent in March.

The variety of proxy indicators available can’t completely dispel investors’ concerns about a lack of transparency that makes pricing risk in China especially difficult. “If the official data lacks credibility, alternative narratives—like an economy on the verge of a hard landing—can take hold,” says Tom Orlik of Bloomberg Economics.

There are those who argue that as China’s economy matures, the quality of its data will improve. In a sign that Beijing is prodding provincial cadres to clean up their act, officials in Inner Mongolia and Tianjin have been publicly called out for exaggerating growth numbers.

Another marker of progress is that China’s National Bureau of Statistics has begun releasing monthly unemployment figures based on surveys—which is how the U.S. and European countries measure joblessness. The latest report showed the jobless rate rose marginally to 5.1 percent in March from 5 percent a month earlier. “I believe China will use the pressures that come with market opening as a way to propel these changes,” says Stephen Jen, chief executive officer of Eurizon SLJ Capital Ltd. in London.

The stability of quarterly GDP numbers isn’t necessarily a sign that Beijing is cooking the books. The combination of a one-party system and a centrally controlled economy means China’s policymakers can intervene quickly and massively when growth drivers wobble—by launching a huge public works program, for instance. “This is a political system that controls market behavior through tools that do not show up in the numbers used in the mathematical models created by and for Western economies,” says Pauline Loong, managing director at researcher Asia-Analytica in Hong Kong. “Dismissing this difference as irrelevant to economic forecasting is to run the risk of ending always slightly behind the curve in identifying what drives growth in China and what generates profits.” —With James Mayger and Jeff Kearns

    BOTTOM LINE - China’s growth figures haven’t varied by more than 0.1 percentage point since 2015, whereas variations of a full percentage point are the norm in the U.S.
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