There is a crucial difference between smoothing data and fabricating it
By S.R. | SHANGHAI
IT ALL seems a little too perfect to be true. The Chinese government set a growth target of “about 7%” this year. And for a second consecutive quarter, despite ample evidence of stress in its industrial sector, it managed to hit that right on its head. In the three months from April to June, the economy expanded 7% compared with the same period a year earlier. Cue the chorus of scepticism: Chinese data just cannot be trusted, goes the usual refrain. Yes and no. There is a difference between smoothing data and totally fabricating it. Evidence suggests that China is guilty of the former (the lesser charge) but not the latter (the more serious allegation).
China has a history of ironing out the ruffles in its growth figures. No less an authority than Li Keqiang, now the premier, once said that local GDP data were "man-made and therefore unreliable". The most notorious case of manipulation came in 1998 in the aftermath of the Asian financial crisis. Many Asian countries suffered recessions but China claimed to grow by a hefty 7.8% that year. Looking at other indicators, many economists concluded that growth was in fact closer to 5%. The manipulations can occasionally work in the opposite direction. In the early 2000s, when China reported growth of 8-9%, some reckoned that it really expanded by closer to 10%. Why would China understate its growth? One possibility is that statisticians missed big parts of the economy. Another is that the government downplayed its strength to avoid arousing anger at a time when its export juggernaut was beginning to rev up.
As China’s economy has become more crucial to rest of the world, its data have also come under closer scrutiny. The theory was that this would make it harder for its boffins to play with GDP numbers. In the first quarter, though, major doubts resurfaced. Industrial production fell to its weakest growth since the depths of the global financial crisis, while the property market, a pillar of the economy, slumped. When China reported real growth of 7% year-on-year in the first quarter, economists noted that this did not stack up with its nominal growth of 5.8%. The only way to arrive at the higher real figure was to record a GDP deflator of -1.1%, implying that the economy suffered broad-based deflation, a bizarre development when consumer prices rose by more than 1% at the same time. Had the GDP deflator been accurately estimated, Chang Liu and Mark Williams of Capital Economics reckoned, real growth in the first quarter would have been about one or two percentage points lower.
China’s new data, published today, appear to be more credible. In nominal terms, growth rebounded strongly from 5.8% year-on-year in the first quarter to 7.1% in the second quarter. The corollary is that the GDP deflator went from deflation of 1.1% to inflation of 0.1%, a reading that is much more consistent with rising consumer prices and falling producer prices. Still, there were signs of some tampering. Without providing any explanation, the national bureau of statistics lowered the quarter-on-quarter growth rate of the second quarter of 2014 to 1.9% from 2%. The effect was likely to lower the base of comparison for the second quarter of 2015, flattering the year-on-year growth rate. The impact, though, would have been relatively small: a few tenths of a percentage point, not a few percentage points.
What’s more, the sources of Chinese growth in the second quarter were less mysterious than in the first quarter. While investment continued to slow, services accelerated. The industrial sector grew 6.1% year-on-year in the first half, down from 6.4% in the first quarter. By contrast, the services sector jumped to 8.4% growth from 7.9% in the first quarter. That matters since services now occupy a larger share of Chinese GDP than industry. There is reason to doubt the sustainability of the services strength. It was predicated to a large extent on financial services benefiting from the stockmarket bubble that popped last month. But the gains for financial services, whether transient or not, were real. China’s statisticians did not invent them.
