Wednesday, January 6, 2016

China Finds False Economic Reports – Analysis

China Finds False Economic Reports – Analysis


China's flag. Source: Wikipedia Commons.BY  

By Michael Lelyveld
After years of falsifying economic figures, officials in China’s industrial northeast provinces are admitting to the practice to make the case that deep declines are not as bad as they seem now.
In a Dec. 11 report, the official Xinhua news agency cited rampant fabrication of economic data in the northeast provinces of Liaoning, Heilongjiang, and Jilin in past years, with some counties claiming gross domestic product (GDP) higher than that of Hong Kong.
Reports of economic data ranging from GDP to investment and household income were all routinely inflated, according to the officials.
The official English-language China Daily quoted Guan Yingmin, head of investment and planning at Heilongjiang’s Committee of Industry and Information Technology, saying that local investment figures were pumped up by at least 20 percent, an overstatement of nearly 100 billion yuan (U.S. $15.3 billion).
Reports of data fraud in China are nothing new.
The National Bureau of Statistics (NBS) has pursued a series of crackdowns on local falsification for over a decade, while the central government has warned ambitious officials that GDP growth will no longer be the sole criterion for advancing their careers.

Past cases

Past cases of provincial data inflation have fed suspicion of national GDP figures, particularly in the boom years when the NBS reported double-digit growth.
In 2012, the NBS launched a direct reporting system for 700,000 enterprises to avoid local pressures for exaggerating production. In late 2014, the agency announced it would no longer rely on provincial and municipal GDP estimates at all.
The latest fraud revelations follow inspections by ruling Chinese Communist Party graft investigators as part of China’s continuing anti-corruption campaign, according to Xinhua.
Local fakery has caused damage to the central government and the party, it said.
“The wave of falsifying data in some parts of northeastern provinces was particularly strong, which not only misguided planning and the decisions of the central and local governments, but also evolved into a corruptive push to jeopardize the party and political conduct and harm government credibility,” said Xinhua.
But there were also suggestions that the findings might be used to support arguments about the current state of China’s economy, which has been particularly weak in rust-belt provinces.
“If the past data had not been inflated, the current growth figures would not show such a precipitous fall,” one regional official told Xinhua.

Lagging behind

Economic performance in the northeast region has lagged far behind national averages as heavy industry feels the brunt of the slowdown and pressure to reduce production overcapacity.
In the first three quarters of 2015, national GDP rose at a 6.9-percent rate, while growing by 6.3 percent in Jilin, 5.5 percent in Heilongjiang, and just 2.7 percent in Liaoning, according to the NBS.
The poor results have been a particular focus for Premier Li Keqiang, who blasted provincial officials for allowing infrastructure projects to languish during his visit to the region last April.
Li accused the officials of “dereliction of duty” and “intentional neglect” after seeing construction equipment standing idle by the side of the road, state media reported at the time.
Now, local officials appear to be defending themselves, arguing that last year’s GDP growth rates would have been higher if they hadn’t been overstated in the past.
“If the old data is exaggerated, then the new data is working off of a smaller base and they can say that growth is faster now. That’s one possibility,” said Derek Scissors, an Asia economist and resident scholar at the American Enterprise Institute in Washington.
In the absence of retroactive revisions, the entire series of numbers should be considered unreliable, said Scissors.

Other implications

But there may be more significant implications of the new fraud confessions.
One is that they may be cited as evidence for the accuracy of national GDP figures, which have been widely suspected of understating the pace of the slowdown.
If past economic exaggerations have magnified the drop-off in industrialized provinces, the same may be true for China as a whole. The NBS is scheduled to release results for the fourth quarter and 2015 later this month.
Conversely, the falsification report may be preparing the ground for even weaker provincial results to come.
The region is expected to face increased pressure from the government’s push to close down surplus production capacity, which has contributed to corporate debt, energy waste, pollution, and producer price drops.
If the central government makes good on its threat, many northeast factories will be forced out of business, leading to even lower local GDP.
“In eliminating overcapacity, China will create conditions for bankruptcy procedures based on market rules and speed of liquidation cases,” Xinhua said in another report following the government’s annual Central Economic Work Conference last month.
Premier Li is likely to be particularly concerned with the poor economic results in Liaoning, where he served as party secretary in 2004-2007. The province has recorded the lowest GDP growth rates of all the 31 provincial-level governments so far.
Liaoning’s official GDP growth dipped as low as 1.9 percent in last year’s first quarter, raising the possibility that real growth turned negative.

Attempt to embarrass

Another possible interpretation of the fraud reports is that they may be meant to embarrass Li politically, said Scissors.
While Liaoning’s economy is said to be lagging now, data inflation, now classified as corrupt, was apparently taking place during Li’s tenure, right under the provincial party leader’s nose.
But there may also be a more positive implication of the report if it means that the NBS is preparing to clear the decks and report negative economic growth in the rust-belt provinces for the first time.
While provincial officials are arguing that their current growth rates would look better but for past exaggerations, the real story is that future numbers are likely to look worse.
Scissors said the region may already be in recession.
“There’s a real possibility here that they’re going to be willing to report outright contraction,” he said. “It fits with what’s reality and it may offer them some public relations points. This could be step one.”
One of the provinces will have to break the political ice by reporting negative growth, he said, but the result could be greater credibility for China’s national GDP figures.
“You can absolutely turn this into something positive by saying, ‘Now, you should believe our other growth numbers,'” said Scissors. “That would give more confidence that the areas of the economy they say are doing well are actually doing well.”