We Know China’s Been Lying About GDP – But How Much?

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A claim that China’s been lying about the GDP numbers this past decade. The thing is, we know, absolutely and without doubt, that China and parts of it have been lying about GDP this past decade. The only thing is, how much have who been lying?

In more detail we know, absolutely and without doubt, that the various provinces have been lying about the growth in their own province. Simply because we’re in a communist system, with a plan, outperforming the plan improves careers. Thus people will lie that they’ve exceeded the plan. OK – but China’s national leaders might be deluded, they are communists after all, but they’re not stupid. They know this and attempt at least to adjust for it.

But have they been adjusting the right amount?

China ‘exaggerated’ GDP data by 2 percentage points for at least nine years, new study says
Mainland has overestimated its nominal and real growth rates by about 2 full percentage points on average between 2008 to 2016
Calculations suggest that the current nominal size of the economy is about 18 per cent lower than the official level of US$13.4 trillion at the end of 2018

Well, that’s possible. No, really, it’s entirely possible that this sort of miscounting has happened. It doesn’t even need to be meant. We know, absolutely again, that we’ve been miscounting the US economy for decades. In the other direction unfortunately but there we are. CPI inflation has very definitely been over-estimated. The only argument is over how much. So, if inflation is recorded as higher than it is, then real income – nominal minus inflation – will be too low. We do really know that this is true for the US. How much? Well, some estimates say as much as 1.5% a year too high for that recorded inflation rate. Meaning the real economy is listed 1.5% smaller each year and counting than it really is. Others would argue lower amounts but no one at all is claiming that the problem doesn’t exist.

2% either way in recording GDP? Sure, we can believe that has happened.

China’s national accounts are based on data collected by local governments. However, since local governments are rewarded for meeting growth and investment targets, they have an incentive to skew local statistics. China’s National Bureau of Statistics (NBS) adjusts the data provided by local governments to calculate GDP at the national level. The adjustments made by the NBS average 5% of GDP since the mid-2000s. On the production side, the discrepancy between local and aggregate GDP is entirely driven by the gap between local and national estimates of industrial output. On the expenditure side, the gap is in investment. Local statistics increasingly misrepresent the true numbers after 2008, but there was no corresponding change in the adjustment made by the NBS. We provide revised estimates of local and national GDP by re-estimating output of industrial, wholesale, and retail firms using data on value-added taxes. We also use several local economic indicators that are less likely to be manipulated by local governments to estimate local and aggregate GDP. The estimates also suggest that the adjustments by the NBS were insufficient after 2008. Relative to the official numbers, we estimate that GDP growth from 2008-2016 is 1.7 percentage points lower and the investment and savings rate in 2016 is 7 percentage points lower.

The claim here is a little different. Both nominal and real are overstated, so it’s not the inflation rate mistake. We can observe, each and every year, that if we add up the provincial estimates of growth they don’t equal national growth. So we know the provinces are lying. We also know that national level adjustments to take place to try to accord with reality. The claim here is that those adjustments aren’t sufficient. Whether by design or mistake is another matter – although in a communist system which claims to be able to plan the economy we’d guess by plan.

Is China’s GDP overstated by 2% a year, thus 18% cumulatively? Difficult to say. No, it’s complicated. Along with all of the above we also know that we’re not including new technologies and activity in the economy well. GDP numbers are better thought of as a guide to direction than an accurate reading. This specific research into this specific issue does seem well founded though. Sticking entirely within the terms of reference here – ignoring those larger issues – we’d go with, on balance, yes, over estimations have been going on.

The importance of this? Not very much, not very much at all.