China’s ‘Fake’ Economic Data: Why I’m Not Concerned

In recent years there has been an obsession that China’s economic data is ‘fake’.

A March 7, 2019, Brookings article, which went viral, A forensic examination of China’s national accounts, estimates that China’s GDP growth from 2008-2016 is 1.7 percentage points lower than the official numbers.

In a 2013 article by Foreign Policy, Lies, Damned Lies, and Chinese Statistics, China’s Premier Li Keqiang, “has said (as quoted in a U.S. State Department cable published by WikiLeaks) that China’s GDP figures are ‘man-made’ and therefore unreliable.”

However, the article concludes that the numbers are likely not fake and that the accuracy of estimating GDP has improved over time:

The reality of China’s official data today is not the crude controlling hand of the Politburo dictating the GDP growth figure. It is an increasingly reliable and comprehensive set of economic indicators that remain compromised in some areas by the difficulty of measuring a rapidly changing economy, imperfect surveying methods, a recalcitrant sample set (the Chinese public), and continued political sensitivity. The system is not perfect. But neither is it a farce.

So who’s right. I’m in the camp that China’s data is likely not fake, and that discrepancies of calculating GDP are within appropriate margins of error.

Pundits have been predicting an economic crisis in China as far back as 2005. China’s growth has already slowed a lot since peaking in the late 2000’s and the world didn’t end. The biggest crisis to come out out world for the past decade has not been out of China but rather Southern Europe, such as as Italy, Spain, Portugal, and Greece.

If China were lying about its growth then that would imply that US companies that do business with China are also somehow lying, because such information is reflected in financial statements. Major multinationals such as Apple and Disney and Starbucks do a lot of business in China. The fact that exports and imports have risen dramatically over the past few decades is demonstrative of legitimate economic activity. An exports-driven economy like China cannot cannot totally conceal the health of its economy, because there are so many external, independent market participants that do business with China. If China’s GDP were zero or negative, then there would presumably be less demand for Iphones and then Apple would report that China iPhone growth has slowed. Same for Starbucks and a whole bunch of other companies.

The 1.7% overestimate is probably within the margin of error, especially given the imprecise science of calculating GDP. This is why quarterly US GDP figures are occasionally revised, and these revisions are sometimes significant.

China’s real GDP:

1.7% overestimate of a 15% growth rate/volatility is only a 12% discrepancy. That is along the lines of US GDP revisions.

And also, in accordance with the efficient market hypothesis, given the widespread belief that China is inflating its data, such overestimates are already discounted by market participants. If it were revealed tomorrow that China’s economy is actually as big as purported to be, then I’m sure the market would respond very favorably, because the widespread perception is that it’s smaller.

Overall, I’m not that concerned. Whether it’s fears about debtbubbles, empty buildings, or ‘ghost cities’, China keeps defying predictions of its imminent economic collapse, that seems so inevitable and obvious, yet always comes to pass. These people who keep predicting crisis think that they are privy to some sort of special information that apparently everyone else is oblivious to in spite of the fact that the media keeps talking about it. They are just throwing darts at the wall and hoping one of them sticks. They need to just give it a rest and admit they were and still are wrong.