China is a very interesting country. They cherish their Communist tradition which has been in power since roughly the end of WWII. A few decades later the country embraced elements of capitalism to help their country grow. Leaders recognized some of the failings of Communism and adapted to expand and modernize the economy. While the government still maintains strict controls and limits certain freedoms, the general shifts towards capitalism has increased freedoms and a fully representative democracy is an inevitability; though it will take time. Another inevitability is China eventually becoming the largest economy in the world. Even though that hasn’t happened yet, people are starting to believe it’s already true.
Below is a chart of China’s GDP growth compared to the US. This is not that same is level of GDP, which the US is still the leader in (the biggest struggle to grow).
In the interim, there’s still a lot of centralized control. The government owns or controls many industries and the line between business and political leader is sometimes blurred. To make reliable comparisons to economies in other parts of the world, economists rely on data published by the Chinese government. Many have long thought that China manipulates its data to make the country look more strong and stable than it actually may be. I have always thought that may be the case in some form or another. I expect their centralized data agency would collect regional data, compile it, and play with the number to make things look extra rosy.
Even if that is occurring, I hadn’t thought of the possibility of this occurring at the regional level. It didn’t make much sense. Until you account for the individual benefits of a regional leader making things look good. For them the benefits are political. They could get promoted and be in more powerful or lucrative positions. When your boss comes calling for the latest report on trade, you might look better saying things are up 7% instead of just 5%. Especially if you beat out your regional peers.
But how can it be proved? According the NY Times there are a couple of ways. First of all, people within China with access to the data can say the numbers are being polished because they are the ones doing it or see it happening. The second way is to compare all the data and see if trends are in agreement. Look at electricity usage for example. It’s a strong indicator of the economy because the more it’s used the more economic activity is likely taking place. If I’m responsible for reporting those numbers I might be able to embellish them some. But a harder number to embellish, and perhaps outside my control, is coal.
China is the largest consumer of coal, and generates 2/3 of its electricity from it. And so if electricity usage is going up, you can’t expect storage of surplus coal to go up too. But that’s exactly what’s happening. Many believe that electricity usage isn’t climbing as quickly as indicated, and coal surplus is telling the true story.
For China, this could be one of many indicators that their economy is not as strong as expected. There are other things going on there as well that illustrate a similar picture. Estimates are that the manipulation could explain away 1-2% of GDP growth every year. That doesn’t sound like much, but in the US that’s pretty much the difference between recovery and recession.
Don’t expect this manipulation to be sustainable for China. Whether it’s regional leaders protecting their jobs, a centralized conspiracy, or both, it would catch up to them. You can’t fake it till you make it. And a slowly emerging independent press inside the great wall is likely doing digging of their own.
Read: Chinese Data Mask Depth of Slowdown, Executives Say
Another resource referencing the same article: Wall Street Oasis