China's growth data - can you trust it?
19 January 2016
China has reported its latest economic growth data and once again it's almost perfectly in line with the official target. Investors in China and the global economic community may be breathing a sigh of relief - but like every other time, there's suspicion over whether we can actually trust these figures. Every three months, China releases what's called its Gross Domestic Product (GDP) - and economists look at the percentage at which the economy grew compared to the same period the previous year. And every time, there's doubt that the numbers might be inflated and therefore can't be trusted. Economic growth is not only a measure of the overall value of goods and services produced, but it's also a matter of pride, prestige and aspiration, an arena where the US or Europe are effortlessly defeated by Beijing and where China and India seem to compete over the future. China, though, has more reasons than mere international prestige for possibly inflating its data. The chaos that saw the country's stock markets tumble over past weeks and months has shown that domestic traders are somewhat prone to panic selling and disappointing economic data has been among the triggers for such panic. "We all know the growth data is overstated, particularly at the moment," says Hong Kong-based investment analyst Peter Churchouse. "It's a political gesture: they have to keep the domestic markets believing that growth is roughly close to 7%." While growth data is never 100% accurate, China is still a developing country when it comes to standards in its fiscal management. "There is a risk of smoothing it because of the political rationale. But it's as much technical constraints in terms of data management and collection as outright political manipulation," explains Tom Rafferty of the Economist Intelligence Unit in Beijing. The way that the GDP growth figure is collected poses another problem. The data comes from provinces across the country and as much as Beijing stands accused of inflating the overall number, the individual provinces are also thought to beef up their results. In December 2015, even Chinese state media suggested that regional economic data had been drastically inflated, with one province reporting revenue 127% higher than the actual number. According to US diplomatic cables released by Wikileaks, China's current Premier Li Keqiang back in 2007 described regional GDP data as "man-made" and unreliable. He instead suggested determining growth from electricity consumption, volume of rail cargo and amount of loans disbursed. As a consequence, economists calculated a somewhat informal Li Keqiang index, measuring precisely those three factors as a way to put official data into perspective. But the problem is that just like the official data collected, the Li Keqiang index focuses too much on traditional industry while neglecting China's transition towards domestic consumption and the service sector - which are much harder to measure than, for instance, the output of a factory. In an advanced economy, employment numbers or income growth give crucial additional insight into an economy's performance, but in the case of China, such data is either simply not published or considered unreliable. Yet it's not as if there are no other clues that analysts can turn to, explains Mr Rafferty. "We've got retail data that comes out every month, and you can get quite micro level data now on things like cinema tickets, mobile phone and data usage. So even those are among the things we're moving towards in our analysis." Gross domestic product is a flawed economic indicator, but "if you don't look at GDP, what do you look at?" asks Mr Rafferty. After all, it is the one number which is most widely reported on when it comes to China's economic performance. And even if it's just for lack of more reliable statistics, it does have an impact on both China itself and on global economic sentiment. "There is a lot of political pressure for Beijing to publish half-decent numbers," Mr Churchouse sums up. And while that undermines the credibility of the official release, "the number that's printed does still have a big impact on the world." In the end, it means that most analysts treat any official Chinese data with caution, while having limited ways to establish an alternative, more accurate assessment of the world's second-largest economy. Sure, it matters to people in China. High economic growth is important, it most likely means more jobs and probably higher wages. But beyond China, why would you care if you're reading about it elsewhere in Asia, in Europe, the US or Africa? Well, economic growth is supposed to be the main indicator of how well a country's economy is doing. And in a globalised world, China's economy is crucial to countries around the globe. It's sometimes even referred to as "the engine of the global economy". If you're working for a European or Japanese car company and China is an important market, it matters how much spending power the Chinese middle class has. If you live in Nigeria and China is planning a massive infrastructure project, it matters how much money Chinese companies have to spend on that investment. If you're down in a mine in Australia or Indonesia and the iron ore or coal you're extracting is sold to China, it matters whether demand is increasing or slowing. And if you're working in a steel plant in Wales, it matters whether China is flooding global markets with steel too cheap for you to compete with. That's why having an accurate picture of China's economic growth is important.
Every three months, China releases what's called its Gross Domestic Product (GDP) - and economists look at the percentage at which the economy grew compared to the same period the previous year. And every time, there's doubt that the numbers might be inflated and therefore can't be trusted. Economic growth is not only a measure of the overall value of goods and services produced, but it's also a matter of pride, prestige and aspiration, an arena where the US or Europe are effortlessly defeated by Beijing and where China and India seem to compete over the future. China, though, has more reasons than mere international prestige for possibly inflating its data. The chaos that saw the country's stock markets tumble over past weeks and months has shown that domestic traders are somewhat prone to panic selling and disappointing economic data has been among the triggers for such panic. "We all know the growth data is overstated, particularly at the moment," says Hong Kong-based investment analyst Peter Churchouse. "It's a political gesture: they have to keep the domestic markets believing that growth is roughly close to 7%." While growth data is never 100% accurate, China is still a developing country when it comes to standards in its fiscal management. "There is a risk of smoothing it because of the political rationale. But it's as much technical constraints in terms of data management and collection as outright political manipulation," explains Tom Rafferty of the Economist Intelligence Unit in Beijing.
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How good are China's stats?
Sure, it matters to people in China. High economic growth is important, it most likely means more jobs and probably higher wages. But beyond China, why would you care if you're reading about it elsewhere in Asia, in Europe, the US or Africa? Well, economic growth is supposed to be the main indicator of how well a country's economy is doing. And in a globalised world, China's economy is crucial to countries around the globe. It's sometimes even referred to as "the engine of the global economy". If you're working for a European or Japanese car company and China is an important market, it matters how much spending power the Chinese middle class has. If you live in Nigeria and China is planning a massive infrastructure project, it matters how much money Chinese companies have to spend on that investment. If you're down in a mine in Australia or Indonesia and the iron ore or coal you're extracting is sold to China, it matters whether demand is increasing or slowing. And if you're working in a steel plant in Wales, it matters whether China is flooding global markets with steel too cheap for you to compete with. That's why having an accurate picture of China's economic growth is important.
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Does it even matter to me?