The truth about China's GDP numbers

Whenever politicians or business people need to talk about China, it is obligatory to talk about China’s double-digit growth over the last three decades. Many leading international institutions such as the World Bank and the International Monetary Fund have accepted that figure as an article of faith.

However, many observers doubt the accuracy of the country’s GDP figures and even Chinese premier Li Keqiang secretly confided to the American ambassador back in 2007 that GDP figures in Liaoning, a rust-belt province where he was then party boss, were man-made and unreliable.

The reliability of Chinese GDP figures has come under the spotlight once again after 30 provinces and municipalities released their latest figures recently. If we tally up all provincial data for the first half of the year, the country produced 29.7 trillion yuan or $5.17 trillion in goods and services. It is 10.43 per cent more than the national figure released by the National Bureau of Statistics.

For China watchers, the discrepancy between provincial and national GDP figures is nothing new. This is a regular feature of the murky world of Chinese statistics. Senior Chinese economic officials, including those from the National Bureau of Statistics and the National Development and Reform Commission, the economic planning agency have publicly derided local officials’ efforts to inflate local GDP figures.

If a lot of people question the accuracy of China’s GDP: how fast has the world’s second largest economy really grown in the three decades from 1978 when China started its economic reform? Harry Wu, senior adviser to the Conference Board China Centre for Economic and Business, estimates that China’s GDP growth for the reform period 1978-2012 is only 7.2 per cent.

It is considerably lower than the official estimate of 9.8 per cent, making China’s economic growth less impressive. Wu argues the principal culprit behind China’s over-stated economic growth rate is due to an understatement of external shocks such as the global financial crisis.

For example, during the global subprime mortgage meltdown, China maintained a growth rate of 9.1 per cent, sparking wild talk of China’s ability to decouple its economic growth from that of the US and the eurozone.  However, Wu argues China only managed to grow 4.7 per cent in 2008, more than 50 per cent less than the official estimate. 

A prominent Chinese economist Wang Xiaolu made a similar observation recently at a forum held at Tsinghua University in Beijing. During the 2008 global financial crisis, the Chinese export sector, a key engine of growth, shrank by as much as 20 per cent from the fourth quarter of 2008 to 2009.

Electricity consumption was also down from 14.4 per cent growth in 2007 to a mere 5.6 per cent increase in 2008. Railway freight, another important indicator of economic activity, also declined from 9 per cent growth in 2007 to only 0.9 per cent in 2009. However, despite a significant decrease in these two key economic indicators, the official estimates for 2008 and 2009 GDP growth are still healthy at 9.6 per cent and 9.2 per cent, respectively.

“I think the figures from these two years are inflated and not very accurate,” said Professor Wang.

The Asian Financial Crisis of 1997-98 is also another period in which there was a significant discrepancy between key economic indicators and the official GDP estimate. 1997 was a difficult year for the Chinese economy after Beijing tightened its fiscal policy to cool down an overheated economy, electricity and railway freight both declined considerably, yet the official estimate still put the growth rate at 9.3 per cent.

The 1998 Asian financial crisis was a watershed event for many Asian economies. Many tiger economies fell like dominoes and the crisis also unleashed political change in places such as Indonesia where military strongman Suharto was ousted from power. Though China remained relative steady compared to other Asian economies, its economy took a massive hit nonetheless.

Electricity consumption only grew 2.8 per cent and railway freight dipped into red at negative 4.6 per cent growth. Despite all that, Beijing confidently asserted that the economy grew at 7.8 per cent, which is just a touch below the 8 per cent official growth target set by the Chinese premier Zhu Rongji. Wu put China’s real growth rate somewhere around two per cent.

Chinese leaders also realised the problem of inflated GDP figures. During a visit by the then premier Zhu Rongji to the National Bureau of Statistics, he urged them "not to fudge numbers".  Chinese policymakers understand poor quality data can have a significant impact on the economic policymaking process, with potentially dire consequences.

Wu and Wang both blame the government’s obsession with 'GDPism' as the main culprit for the inflated economic data.  The career prospects of China’s local officials have been largely dependent on GDP related matrix including investment, urbanisation rate and employment figures. Though Beijing is introducing more inclusive incentives such as for environmental protection, it is likely that the GDP-related matrix will continue to dominate for many years to come.