Are We Getting an Accurate Picture of China?

By: Hari Sud
October 22, 2005
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A little over a trillion dollar economy, 1.3 billion people to feed, $400 Billion in exports, 260 million tones of steel production, cities with high rise skyline and maglev train system and above all a $55 Billion Foreign Direct Investment in year 2005 is an impressive statistics. It has turned China into a darling of investors and western media. No matter which business newspaper in the West you pick or which 24 hours TV business news service you tune into, China news dominates. This is a free publicity for the Chinese and they are enjoying it.

Are we getting a true picture of the state of affairs in China?

I believe we are being misled. The only way to prove the forgoing argument is to put together an analysis of all the data which is independently generated and which has less likely doctored by the smiling Chinese statisticians in Peking. In other words, there is a need to go underneath the clever statistics making in Peking.

China Statistics from 1950 to 1975

Chou En Lai, the Chinese Prime Minister directed this statistics making in the early part of the Communist rule. He had an eye on the publicity value of any Chinese achievements. In 1956, he said that China was food self-sufficient. The fact was that China had a major famines in 1957-59 and then again in 1965. Later famine in 1970 has been blamed on the Cultural Revolution. In 1960 the Chinese announced that they have produced about 100 million tones of steel exceeding US. The fact was that pig iron smelter were built where coal and steel ore existed very much like the oil rigs mushroom oil & gas fields. This resulted in huge amount of low-grade pig iron at factory doors, which nobody wanted. The point is that Chinese are very good in manipulating the statistics in their favor. The world at that time learnt not to rely upon on statistics given by them. Instead an independent analysis was carried out. Satellite technology allowed the US to accurately forecast crop production hence determined amounts Chinese will import. Machinery imports and finished goods export by the Chinese was another measure to get an accurate estimate of their industrial activity. This independent analysis has now been jettisoned in favor of highly questionable data coming out of China. Below in this analysis, I will discuss some of the published inaccuracies.

Statistics from 1975 Onwards

To satisfy the West’s need for economic data, Chinese regrouped their statistics makers into a central statistics organization called National Bureau of Statistics in 1980. But old habit of rounding the numbers, falsifying data to look good in the eyes of the Central Committee of the Communist Party continued. Here is a look at some of the statistics and independent review:

Chinese per capita income using their GNP data this year will touch about $1,050. It is low at about most developing country level. But they pretend to be an advanced nation comparable to Europe and Japan.
The recent UNCTAD (United Nation Conference on Trade & Development) report has questioned China’s awesome Foreign Direct Investment (FDI) data. UNCTAD says that it does not agree with the investor’s data. http://www.rediff.com/money/2005/oct/03china.htm
Thomas Rawski, the Harvard educated, Professor of economics at University of Pittsburgh in Forbes magazine, believes that the Chinese government systematically falsified their GDP data in 1998 and 1999 to hide an economic recession.
http://www.forbes.com/2003/11/14/cz_rm_1114china.html

(Professor Rawski believes that China’s economic growth is about half the data they pan out to the world press)

Goldman Sachs is so sick of the faulty statistics from China that they recently have started to gather their own data to determine the Chinese economic progress.
Florence Chan a journalist of Chinese origin writing in Asia Times called China’s statistics as “lies, damn lies” http://www.atimes.com/atimes/China/FJ23Ad01.html

Volumes have been written on faulty Chinese statistics. None of the governments in the West and media barons in particular ever dared to question the statistics. They faithfully keep on informing the unsuspecting public (in the West as well as elsewhere) of China’s great economic miracle. Result is that China is the buzzword when it comes to investing and importing cheap consumer goods. Chinese rulers themselves maintain a tight lip on the subject. They like the positive publicity and the business it generates for them.

What goes Wrong When the Statistics are Created

According to Florence Chan, the statistics making in China is a five-grade affair. It begins in the village, moves to the city, onwards to the province and then to the country and then to the State Committee. At each level, data is fudged or rounded upwards to look good. Remember, China is still a Communist country; any failure is punishable by banishment or in worst-case scenario, death. Hence everybody has to report good statistics. Interesting feature of data generation is that if the state or central committee sets up a target of 8% growth or increase, the village level or the city level must report a percentage or two higher. Lower or equal report will not look good. The national level data gathering bureaucrats are fully aware of this fudging. They are under the same pressure as state or city level; hence faithfully use the modern techniques of computers and analysis to report the faulty data. The latter becomes a gospel in the West.

What do Smart people in the West rely upon?

Window dressing by the Chinese has turned many of the China watchers off. They immediately take a percentage or two out of the reported statistics or rely upon their own devices to reach their own conclusions. Professor Rawski uses secondary sources to reach his own conclusions. These include airline occupancy rate, little known Chinese trade journals (not directly connected to the great official statistics-gathering machine in Peking), or other means like true investments in China (UNTAD data), import statistics not from China but from the exporting country, eliminating double accounting at city, state or village level or simply checking whether they have reported in metric tones or other weight measures. Each of these will have a dramatic impact on the net GDP calculated. Impact of all these corrections will lower the Chinese GDP over twenty years by well over 20 to 30%. This re-calculation will be a great blow to the Chinese elite now ruling and the country. It will bring the sky rocketing prestige of China’s economic progress to a more earthly level. If you take 20% off the $1.3 Trillion Chinese GDP reported it would be about a Trillion dollar and Chinese per capita income at about $800. That is a more realistic number (comparable statistics for India are: GDP of $690 Billion and a per capita income of about $690).

What we see, is that the Truth?

Chinese use the FDI to build new factories and infrastructure. This is directly visible as soon as you land in Shanghai or Peking or you go anywhere in Guangdong or Jiangsu or Hebei provinces. These provinces are the direct beneficiaries of the foreign investment. The airport infrastructure in Shanghai is even better than Heathrow in London. Roads leading to or from Shanghai, where the foreign visitor likely to make an impression are par excellent. The same is true about the Guangdong province opposite Hong Kong. This province was the first to receive the benefits of foreign money. Visitors coming to China are parked in the best hotels with neatly manicured lawns and connected with an excellent road system. These visitors on return report of great things in China. They forget to mention that they had a limited access to the country. Everybody in China does not live in Peking or Shanghai. There are 1.3 Billion souls in China. Only 18% of them live in these prosperous areas. Rest live on far less than $800 a year in areas untouched by the great rush of FDI. Chinese politicians rather not talk about it.

Myths of China’s economic growth

Here are a few points to ponder:

Chinese economic growth is not 9.4% but a bit lower. It is one or two points below the stated figure. The latter is the belief of some of the leading experts who have an intimate knowledge of figure fudging.

Chinese Steel production of 260 million tones and 1.1 Billion tones of Coal and 600 million tones of cement, 7 million barrels a day of oil output, over 2 Billion Kwh of power is a humbug. A little over a trillion dollar economy does not need that much of basic resources, unless some of it is wasted. Value of these products and other industrial commodities is alone worth $400 to $500 Billion. Add to that agricultural output of about $600 Billion and value added exports and service industry; the GNP is likely to exceed $2 Trillion. That cannot be true. A mere fact that these numbers do not add up should be a matter of concern for the economists in the West.

Chinese literacy rate is one more interesting fact, which need to be analyzed. A 95% literacy rate for an aging population is only possible, if you include the populace, which underwent 6 months of night schooling during Mao Tse Tung era (a very publicized education of masses took place in fifties and sixties, where six months of night schooling was identified as sufficient to classify them as educated). This education standard, if applied to countries like India, will give it a high literacy rate.

Since UNCTAD is questioning their FDI and trade figures, all the facts given by the official Chinese statistics on exports, industrial activity has to be questioned.

All above are a few examples to make the point that all is not well in what is told thru the official statistics.

What is not visible and is Underneath

That is where everything gets interesting. How come the highly critical Western news agencies report repeatedly statistics from the official bureau? The reasons are few but very unpleasant. These include:

a) Official Chinese displeasure on anybody not reporting as per their policy. Reporters are likely to be thrown out for not following this line.

b) The Chinese diplomats with official press briefing and interviews separately cultivate editors at news organizations in their home base.

c) Political settlement, which China had with the West after the President Nixon’s visit in 1973, includes turning off the negative reporting on China. This policy continues to date.

d) Chinese large manufacturing exports and raw material imports from rest of the world has allowed them to create a very big business lobby. This lobby is a major beneficiary from the trade and other economic relationships hence they jump in the fray in Chinese defense. This really happened when US was exerting pressure on the Chinese to revalue their currency last summer. A host of analysts were on the air or writing in the press to defend status quo.

e) The above lobby showed its hand again when China made a failed attempt to acquire UNOCAL and the very expensive acquisition of Canadian Petro Kazakhstan. Completely unknown groups were leading a very positive campaign in the press to support the Chinese bids. US political opposition to UNOCAL acquisition was termed as anti free trade and competing Indian bid for Petro Kazakhstan was termed as amateurish and lacking experience. Only time will tell whether Chinese were right in over bidding the Indian. Will they ever take away oil and gas out of Kazakhstan economically, is a question many analysts ask.

The Free Western Press

They are the major victims of Chinese manipulation of economic data. They never questioned what they were being fed. They are so afraid of being ejected out that they accept everything official, as gospel. It should not bother anybody if Chinese think very high of themselves. Chinese always called themselves as middle kingdom, well above anybody on the earth. But it should bother everybody when India and China with roughly same achievement economically (except in the FDI) are bracketed together with praise for anything Chinese and scorn on anything Indian. That is a double standard.

There is a lot to learn about China. But none of the very positive stories, which circulate in the media, are a true representation. Truth can never emerge as long as the West does not properly evaluate its economic, political and strategic relationship with China. Digging for the truth will be unwelcome by the Chinese. They worry about its economic consequences and its impact on their prestige. They rather stay in the middle kingdom than come down to the earth.

Hari Sud

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