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Scrutiny
  
Is China fudging shamelessly?
Genuine concerns on manipulation of data cast serious doubts over the way the Chinese economy is progressing. Considering how this has serious implications for the world’s second largest economy, and consequently for the world at large, China must work together with international experts to sort this out at the earliest
30/08/2012

Pundits call it ‘the’ case in point when it comes to superlative achievement in a holistic sense. Optimists insist that it is the next centre of power for the world. Pessimists call it the beginning of an end. China, in the past one decade, has quadrupled its GDP from $1.2 trillion to $7.3 trillion and ultimately became the world’s second largest economy – that too amidst the global economic slowdown (read this issue’s cover story on the Chinese story, which is a joint research between Cornell-IIPM Think Tank-B&E)!

Nobody can dispute China’s unparalleled progress, but the mysteries inherent in some of their official statistics are clearly discomfiting. Paradoxically, for this 2nd fastest growing economy, the overall electricity consumption is showing a reverse trend. It doesn’t require rocket science to establish a correlation between industrial growth (a vital part of national income) and electricity consumption. It’s more astonishing a fact since China was among the countries that, to protect industrial growth, rejected a proposal to contain electricity consumption to fight global warming.

According to a report by The New York Times, regions like Shandong and Jiangsu have seen a decrease in electricity consumption by over 10%. The report further revealed that the “coal stockpiled at Qinhuangdao port reached 9.5 million tons this month, as coal arrives on trains faster than needed by power plants in southern China. That surpasses the previous record of 9.3 million tons set in November 2008, near the bottom of the global financial downturn.”

Interestingly, local Chinese officials are known to keep two sets of accounting books as their performance is measured on economic targets. Apparently, officials often manipulate local data to show a rosy picture in their region. John Lee of Newsweek wrote in July 2010, “Statistics come in from all over the country. The provinces compile them with impossible speed – [in] around two weeks, or three times as fast as many developed economies with much more efficient processes of data collection.” US takes over a month to assimilate such information (with 1/4th of the Chinese population) and India takes more than a quarter.

The Purchasing Managers’ Index (PMI), which reveals financial activity with respect to trade of goods, further raises concerns. China’s official PMI (March 2012) was around 53 points (anything above 50 is considered a healthy economy), while the PMI projected by HSBC China was less than 48. More interestingly, the two figures have shown wider variations during global recession (and slowdown) as compared to normal periods.
A polynomial regression of US-China imports and US-China exports by the IIPM Think Tank over the last 25 years reveals eye-opening insights. Since Sino-US trade impacts their respective economies at large, the regression line would indicate a close relationship between their economies. In normal economic cycles, both trend lines were indeed in line with this hypothesis. But in all recession years, the trend lines were peculiarly diverging from each other, and this did not sync with China’s double digit growth rates. Moreover, the compounded annual growth rate in trade fell into the negative quadrant when there was a global economic slowdown again! In 2010, when China declared that it had surpassed Japan’s economy, the US-China trade regression graph revealed how unhealthy China’s trade with US was, with the trend line almost touching the sub-zero mark. Annual export and import growth rate in that year was -0.33% and -12.25% respectively, and it further dropped to -57.36% and -59.44% respectively by the end of June 2012.

Even in August 2010 (exactly when China surpassed Japan), all was not well. The Chinese economy has been visibly weakening since January 2007 and things only got worse by 2010. In such a situation, double digit growth is highly unlikely. Also, HSBC’s PMI dropped below the 50 mark and China’s official PMI was also relatively weak in 2010. This isn’t a new phenomenon. China witnessed a rosy economic condition even amidst the 1998 east Asian financial crisis, despite the fact that China’s trade with east Asian nations saw a pause in that period.

A WikiLeaks note dated March 15, 2007, 10:24 (Beijing 001760, Trade Relations with Ambassador, Classified By: Ambassador Clark T. Randt) saw current Chinese Vice Premier Li Keqiang (then head of the Communist Party in northeastern Liaoning province) being quite forthcoming in admitting to authenticity issues. The WikiLeaks quotes Randt thus, “GDP figures are ‘man-made’ and therefore unreliable, Li said. When evaluating Liaoning’s economy, he focuses on three figures: 1) electricity consumption, which was up 10% in Liaoning last year; 2) volume of rail cargo, which is fairly accurate because fees are charged for each unit of weight; and 3) amount of loans disbursed, which also tends to be accurate given the interest fees charged. By looking at these three figures, Li said he can measure with relative accuracy the speed of economic growth. All other figures, especially GDP statistics, are for reference only.”

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