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Once Again, China Has Been Cooking the Books

To skeptics of China's economic success, news of local governments' misreported figures come as no shock.
A close up a 100 Yuan Chinese note.

In recent years, countless headlines have declared the Chinese economy would surpass that of the United States—or that it already had.

But Chinese officials admitted this week—and not for the first time—that its leadership has been cooking the books. The admission calls into question, once again, those proclamations of Chinese economic dominance.

Chinese anti-graft authorities said in a statement Monday that two local governments—Jilin Province and the Inner Mongolia region, both of which lie in the north—had falsified financial data. The statement comes months after similar findings were released on the local government of Liaoning Province, also in the north. The exact scope of those inflated performance evaluations was not revealed.

The news of the local governments' misreported figures came as no shock to the many skeptics of China's fabled economic success story.

"Observant economists as well as Wall Street analysts have always been skeptical of China's economic data. Good times or bad, China always seems to post numbers that meet the targets set by central planners," says Arthur Dong, a professor of international relations at Columbia University specializing in Chinese economic affairs.

These problems, which arise from China's central leadership setting targets for its local leadership to meet, are nothing new. During the Great Leap Forward, Chairman Mao Zedong's economic campaign of the late 1950s and early '60s, local officials famously misreported crop yields to central authorities, contributing to a crippling famine.

Those targets are still in place, analysts say—and they're still hurting China.

China's mechanism for reporting economic performance sets it up for failure, says Kevin Tsui, an economics professor at Clemson University specializing in the Chinese economy.

"For a number of years, local government has incentives to manipulate their financial data because local leaders' promotion opportunities are related to these statistics," says Tsui, speaking to Pacific Standard from Hong Kong.

"Good times or bad, China always seems to post numbers that meet the targets set by central planners."

Dong agrees. "Provincial party leaders are both praised and promoted if they announce numbers in line with targets. They are punished if they don't meet the numbers," he says.

"Producing the numbers that Beijing likes will always lead to promotions and career advancement within the party apparatus," Dong says. "There is a 'get what you pay for' element to the incentive system that encourages provincial leaders to game the numbers."

For China—now reportedly growing at the slowest rate in the few decades since it opened itself to the rest of the world—to restore its once robust economic growth, it must cast off its long-problematic targets system, says William Hurst, a political science professor at Northwestern University.

"The main issue here is not that a couple of provinces faked economic data," Hurst says. "Rather, the real problem is contemporary China's pathological obsession with quantitative targets and indicators as make-or-break criteria for judging officials. This has produced not just fake data, but also ghost cities, myriad useless and failed development schemes, and tremendous waste and inefficiency in China's political economy for at least the past 60 years."

Analysts add that Beijing's revelation of unsound economic data is a sign that China's central leadership is actively working to address its slowed economic growth, and to reassure investors of its future prospects.

"I actually look at the fact that the central authorities are trying to crack down on this as a positive sign that China's leaders want a little bit more transparency and more accurate reporting in the economy," Hurst says "This can help preserve some trust among investors—foreign and domestic—and temper panics that can occur in times of crisis."

But the larger question remains: Is China the world's largest economy? Was its economy ever as robust as it seemed, and does anyone know for sure? Is it set to surpass the U.S., or were all those headlines premised on false financial figures?

Dong believes the U.S. economy will prevail in the long run.

"Yes, by many measures China is now the world's second largest economy. But on many dimensions it still has a way to go to surpass the U.S. I believe much of the talk of an America in decline and dominant China is overstated," Dong says.

But Hurst calls into question the very purpose of determining which nation is faring better.

"The problem with ranking countries by gross domestic product [GDP] is that different people calculate this differently," Hurst says.

How China's central leadership factors local performance reports into its larger national economic performance figures remains unclear, in a country with little transparency in government.

Clemens' Tsui notes that some analysts of Chinese economy have begun to use The Economist's Keqiang Index—named for a measure founded by China's Premier Li Keqiang—that uses electricity consumption and other factors to determine economic performance, the underlying understanding being that GDP figures are faulty.

"If we use 'purchasing power parity' measures, results can diverge markedly depending on exactly how we try to estimate just how far a dollar goes in Country X versus Country Y," Hurst says. "Rather than obsessing over where China's aggregate GDP or rate of GDP growth ranks in comparison to other countries, it would be better to focus on how China's economic growth model is faring relative to its own recent past. Framing the issue that way, we can see that China's economy is in serious trouble on many fronts, and has been for quite some time."

All three analysts are quick to point out that Trump's threats to take on China over trade and allegations of currency manipulation had nothing to do with Beijing's ongoing push for accurate financial data.

The push for real facts on China's finances "has almost nothing to do with the U.S. government or Trump's antics," Hurst says. Nor is it about sizing China up against the U.S. Rather, it is about addressing the country's own slowed growth.

Only when China faces facts can it emerge from its present slump.