Lies, damn lies, and China\'s economic statistics

China has soared almost to the top of the world\'s economic league tables, but whether the official data underpinning its status can be trusted is a constant headache, analysts say. Simmering unease regarding China\'s economic figures has taken on new meaning in recent months with discrepancies in some statistics and questions over just how much gross domestic product (GDP) is really growing. Earlier this year, economists took issue with Chinese monthly trade statistics, which diverged wildly from expectations, and two weeks ago official and private purchasing managers surveys -- a key measure of manufacturing -- surprisingly pointed in opposite directions. Doubts have also been raised about how inflation is calculated. \"If there was an index for suspicion about China\'s official statistics, it would be off the charts, or to use the technical American term, \'crazy bad\',\" Standard Chartered economist Stephen Green wrote in a report. No less an authority than China\'s new premier Li Keqiang has expressed doubts on the issue. Leaked US diplomatic cables show that as the top official in Liaoning province in 2007, he told the then US ambassador that some Chinese data was \"man-made\" and thus unreliable. When evaluating the provincial economy, Li said he focused on only three figures -- electricity consumption, rail cargo volume, and the amount of loans issued, according to a confidential memo released by the WikiLeaks website in late 2010. \"All other figures, especially GDP statistics, are \'for reference only,\' he said smiling,\" according to the cable. China officially overtook Japan as the world\'s second-largest economy in 2010, and analysts say it is only a matter of time before it knocks the United States off the pedestal it has held for more than a century. But when that day finally comes, can the data be believed? Michael Pettis, a finance professor at Peking University and a senior associate at the US-based Carnegie Endowment, said that among China economists, \"no one\" found Li\'s purported comments surprising. \"I mean, we\'ve been told this many, many, many times by government officials,\" he told AFP. \"There\'s a lot of problems in China. One is that there\'s a perception that the numbers have political incentives embedded in them.\" China calculates monthly and annual data far more quickly than France, a much smaller economy believed to have much higher quality data, he noted. \"So you sort of wonder how they\'re able to do it more quickly than the French,\" he said. \"That leaves all sorts of questions open.\" Economists have long questioned the reliability of numbers provided by local government officials whose career trajectory depends on the performance of their region, creating incentives to make figures look better than the reality. Toshiya Tsugami, a former Japanese diplomat who now heads a China business consultancy, blames a governmental structure which gives local authorities broad administrative powers but reserves control over assignments and promotions for the centre. \"The personnel ratings are done based mostly on each leader\'s performance, and what is most given weight is to what extent each local leader has developed his/her local economy, for which purpose the most used measure is GDP,\" he said. \"As a result, local leaders are engaging in fierce competition aiming at higher GDP growth in order to be promoted,\" he added. \"And since they also handle statistics, there is a strong motivation to dress up the data.\" It is widely known that the sum total of growth as reported by each province is much higher than for the country overall, Pettis noted, \"which of course is impossible\". \"I think there is a sense that the National Bureau of Statistics is doing a reasonably good job under very difficult circumstances,\" he added. \"The local provincial and municipal statistical bureaus, maybe less so.\" The report by Green of Standard Chartered, released earlier this year, estimated economic growth for 2011 and 2012 at 7.2 percent and 5.5 percent respectively, far below official figures of 9.3 percent and 7.8 percent. Acknowledging the inherent challenges he had with his calculations, he wrote that his figures could at best be described as \"guesstimates\", adding: \"We have to use official data to question official data.\" Christopher Balding, who teaches at Peking University\'s HSBC Business School, argued in a paper this month that skewed consumer price index data, especially for housing, seriously overstates the size of China\'s economy. \"Conservatively, correcting for housing price inflation... adds approximately one percent to annual consumer price inflation in China, reducing real GDP by more than $1 trillion.\" But experts say the situation is expected to improve as authorities realise they need a better grip on what is happening to create and carry out effective policies. China\'s leaders say they want to change the country\'s economic model to one more resembling advanced countries such as the US and Japan, where consumer spending is the key growth engine, and that will result in slower, albeit steadier, annual expansions. Wang Qinwei, China economist at Capital Economics in London, told AFP: \"If the data are not reliable, then any policy and reform decisions will be wrong.\"