China reports solid economic growth. Should we believe it?

China announced that GDP growth in the last quarter of 2011 was 8.9 percent, which suggests China will have a soft landing as its economy cools. But what's behind the numbers?

When you want to know what is going on in the Chinese economy, where do you look?

Paul Cavey studies excavator sales.

What might seem an arcane detail is actually “a real indicator” of economic trends, says Mr. Cavey, a China analyst at Macquarie Bank. Digger sales point to likely construction, which is a big driver of Chinese economic growth, he notes. “You can’t draw macro conclusions from those figures,” he acknowledges, “but they serve as a sense check of official data.”

That’s important when the official data paint a conveniently rosy picture, such as Tuesday’s announcement that GDP growth in the last quarter of 2011 was 8.9 percent, marginally more than expected, which suggests China will have a soft landing as its economy cools.

That news was good, and it mattered: It lifted stock markets across Asia. But was it true?

Not for Derek Scissors, a researcher at the Heritage Foundation in Washington who dismissed the figure as invented “nonsense … just a PR exercise and a piece of theater.” Mr. Scissors pointed to discrepancies between reportedly solid GDP growth last year and sharp slowdowns in the growth of auto sales, ship orders, and oil imports.

Other experts who also earn their living by poring over Chinese government figures are less dismissive. “Economic statistics are more of an art than a science, but Chinese statistics are reliable enough for practical purposes,” says Arthur Kroeber, head of the Dragonomics economic consultancy in Beijing.

Can you trust the data?

“There’s huge uncertainty over what the data means and whether it can be trusted,” Tom Orlik told reporters recently, introducing his book “Understanding China’s Economic Indicators.”

 “When people think of the production of economic data in China,” he added, “they think about a couple of drunken Communist party officials … picking the number that best fits their own political needs.”

Once, he recalled, that was not far off the truth. The manipulation of economic data for political ends has a particularly tragic history in China: 30 million people died of famine at the end of the 1950s when rural officials fabricated grain production figures in order to pretend to meet the government’s absurdly ambitious targets, providing a wholly illusory impression of the nation’s grain stocks.

Forty years later, during the 1998 Asian financial crisis, provincial officials were still massaging the output figures by which their superiors judged them, said Mr. Orlik. Since then, however, “we have seen significant moves to improve China’s data collection system” by centralizing it, he added.

“China’s economic statistics are actually very impressive,” he says, “with relatively timely, accurate, and comprehensive data published on a range of key indicators.”

Not that this is true across the board. China’s National Bureau of Statistics makes no serious effort to measure the politically sensitive unemployment level, for example: It has officially stood at around 4 percent for a decade, which nobody believes.

Nor does anyone looking for an apartment believe the official accounts of only moderate increases in housing prices – another politically sensitive question –which can only have been based on heavily skewed housing samples.

Scissors sees such figures as evidence that “the statistics bureau is political. It’s not all lies all the time, but the data is so unreliable that I wonder why we are analyzing it so carefully,” he says.

Even some top officials apparently harbor doubts. Li Keqiang, expected to be China’s next premier, told the American ambassador in 2007 that the official GDP figure was “manmade” and “for reference only,” according to a US embassy cable released by Wikileaks.

But a number of foreign analysts point out that the Chinese government has managed its economy well over the past three decades, that it must have used accurate economic data to do so, and that economic policy generally reflects the published figures, which suggests the government is not using a secret second set of accounts.

Rather, they suggest, officials simply cannot always get a firm grip on reality.

Back to reality

Data on fixed asset investment, for example, give a very different picture of housing starts than reports of the area under construction. That, says Cavey, is because developers are required to build on land they buy within two years. “So they tell the government they are building on all their land, so as to avoid having it confiscated, when in fact they are not investing very much at all.

“The standards for reporting are not as high as they are elsewhere in the world,” he adds. Rich people lie about their income to hide bribes, small businesses such as shops and restaurants under-report their activity, and “it is very difficult to have a system that effectively tracks an economy whose structure is changing all the time.”

“The worst fears of political manipulation of the data are misplaced, but the numbers still need to be taken with a grain of salt,” Orlik believes. In the end, he says, reality will prevail over any official attempts to misrepresent it.

“People have a lived experience of what’s going on in the economy,” he points out. “They either have a job or they don’t … they are either seeing wages rise faster than inflation or lower than inflation. That will be much more important for them than whatever the Chinese government says.”

And as more and more people share their experiences and feelings on the Internet, he predicts, “this will mean there is new pressure on officials to produce statistics which are accurate.”