China Struggles With Data Fraud

An analysis by Michael Lelyveld
Chinese workers labor at the site of an industrial park in central Henan province in a file photo.

In the latest sign of trouble with its economic reporting, China's statistical agency has cited "doubtable" investment data from its provinces, state media reported.

On June 3, the National Bureau of Statistics (NBS) said it would launch pilot programs in three provinces to reform data collection on fixed asset investment (FAI), a measure of capital spending often associated with construction activity.

In reports by China Business News and the official Xinhua news agency, NBS director Ma Jiantang suggested that FAI figures in several provinces were suspiciously high.

"The NBS plans to better monitor the data source to reveal trustworthy figures that can not be manipulated by local governments," Xinhua said.

The pilot programs are planned for Shanxi, Shaanxi, Jiangsu, and Guizhou provinces, but the reports also noted concerns with FAI data from Gansu and Qinghai.

Aside from the trouble with individual provinces, the greater national problem is that enormous volumes of FAI spending do not seem to be producing anything.

"The data's credibility is also doubtable because of the notable gap between the quantity of construction work in fixed asset investment and the gross product of the country's construction industry," said Xinhua.

For 2011, the NBS reported work quantity in the construction industry as 19.36 trillion yuan (U.S. $3.15 trillion), some 65 percent more than its estimated output.

In 2011, China's total FAI of 31 trillion yuan (U.S. $5 trillion) reached nearly 66 percent of gross domestic product (GDP), the broadest measure of all goods and services, NBS said.

But last year, some provinces reported FAI that exceeded their GDP, according to Xinhua.

Money spent on 'nothing'?

The comparisons have left China's data gatherers with two unattractive choices. Either FAI is grossly overstated or a lot of spending is just waste.

Derek Scissors, senior research fellow in Asian studies at the Heritage Foundation in Washington, suggests both conclusions are true, but NBS may only be dealing with one.

"Now that they've taken so much criticism about how ridiculous FAI is, they're willing to say FAI is smaller than they thought," Scissors said.

Scissors argued that the components of China's GDP calculations, including value added from investment, have not added up for years, and the gaps have been growing over time.

"It's just huge, and most of that signifies waste," he said. "It means that they're just spending money and nothing is happening. It's not actually creating anything."

Big infrastructure projects, poor construction quality, and cheap bank loans to state-owned enterprises all contribute to the waste problem.

China's new government has started to face up to this by resisting calls for an economic stimulus program like the 4-trillion-yuan (U.S. $652-billion) package that spurred GDP growth in 2009.

But the NBS attempt to deal with the FAI issue is only the latest in a series of efforts that raise doubts about the accuracy of China's economic estimates.

The General Administration of Customs (GAC) has been under fire since December for reporting hefty export growth figures that are believed to mask illicit inflows of speculative "hot money."

In its latest accounting, GAC seems to have gotten the message, reporting that exports in May rose just 1 percent from a year before.

The weaker growth was "partly due to government rules to curb capital inflows disguised as trade payments," Xinhua said.

Falsified data

The NBS has been struggling for years with falsified economic data from the provinces, where officials have relied on inflated production numbers to secure promotions.

Over the years, provincial GDP figures have frequently added up to more than the national totals, prompting cryptic adjustments.

In 2012, the NBS introduced a direct reporting system for 700,000 industrial, service, and real estate companies in an effort to take fibbing local officials out of the loop.

But in a world market that now jumps at the slightest twitch in China's economic numbers, it is unclear whether NBS reports are any more precise than they were before.

In the case of the FAI data, the accuracy may be even murkier because the level of waste may be massive.

The alternative is that "they may be reporting spending that never actually happens," Scissors said.

The thick fog that surrounds all the official economic reporting raises the larger question of whether China's leaders have access to clearer data as they make critical decisions for the country.

"It's the big question. Are there shadow figures that are better?" said Scissors.

He believes that there must be a set of better data available to decision-makers, but that this is still likely to be incomplete.

"What the NBS is trying to do is inch its way forward so that the data available to decision-makers can be improved," Scissors said.

In the first five months of 2013, urban FAI rose 20.4 percent from a year earlier to 13.1 trillion yuan (U.S. $2.1 trillion, the NBS reported,

Last year, FAI helped to drive 50.4 percent of GDP growth, the agency said.

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