China: boom to bust? and statistics

Fruit of the boom threatens to push China's economy out of control

A glut of villas, shopping malls, steel mills and car plants is raising fears of a crash

Jonathan Watts in Beijing

Guardian August 23, 2006

Few views of China's spectacular economic growth could be more impressive than the one offered by the property company Tomson Riviera in Shanghai. From the top floor of its sleek, luxury apartment blocks in the Pudong development zone, you can, say the brochures, look out across the Huangpu river at one of the world's most futuristic skylines.
The panorama does not come cheap. At 180m yuan (£14m) for a penthouse, this is the most exclusive residential complex on the mainland. Unfortunately for the developers, it is also the emptiest.
Since it opened in October last year, the waterfront development has failed to attract a single buyer for any of its 74 apartments. The situation is so desperate that Tomson has decided to put a second block out to global public tender.
Even so, analysts say, the price is unlikely to rise for several years. They blame it on an optimistic initial valuation of £8,200 a sq metre. Others blame a housing market swamped with swanky apartment blocks and luxury villas. In a single week last month, residential prices in Shanghai fell 10%.
But there is another, darker explanation doing the rounds: that Tomson Riviera is the victim of a Chinese economy that is out of control. Unbalanced, overheated and wobbling on the shaky foundations of a debt-ridden banking system, the economy, say some doom-mongers, is heading for a fall.
It is not the first time such predictions have been heard. Since the start of the opening and reform policy in 1978, pessimists have intermittently warned that an average annual growth rate of 9% was unsustainable and would end in collapse. So far they have been wrong. China has not only maintained stable growth, it is accelerating. Yesterday government figures revealed that the number of mobile phone customers in the country, already the world's biggest telecoms market, had grown to more than 431 million in the past year, up 45%.
But how fast is too fast? The question is once again being asked, and not just by the perennial pessimists. In a survey published last month in the respected Caijing magazine, 56% of Chinese economists saw signs of overheating, up from 15% in April.
After the latest quarterly GDP figures revealed an 11.3% surge, even the president, Hu Jintao, who usually avoids economics, joined the fray. He warned of tough measures, including credit curbs and restrictions on land development, to "restrain blind growth in high energy-consuming and polluting industries". After being fixed for a decade, interest rates have been raised three times in a year, albeit slowly, to cool the economy.
Bubble
But although the Chinese economy is growing more than twice as fast as Japan's did during its "bubble" heyday in the late 1980s, Beijing's problem is one of balance more than speed. Developing countries tend to grow rapidly as they catch up with rich countries. With a huge population that is still extremely poor by global standards, China has plenty of ground to make up.
China is unusual in many ways. It is the largest ever developing country; it is the largest country to make the transition from a command economy to a market. It is also ageing fast, and lastly it exports capital to the rest of the world rather than importing it. Where it is similar to other developing economies in the past is that there are distinct signs of overinvestment and wasted resources on a colossal scale.
The US industrialised rapidly in the 19th century, but it suffered periodic, painful and relatively short-lived boom-bust cycles as investors speculated wildly on often uneconomic projects. China, it is feared, could be on the brink of something similar: a savage but temporary slowdown that will not affect the country's long-term growth prospects.
The national development and reform commission, the pilot of China's economy, noted with alarm recently that fixed asset investment increased 29.8% in the first six months of the year. In the car and textiles sectors, the increase was more than 40%.
The trigger for a crash could be a period of weakness in the US, the main customer for low-priced goods from Chinese factories. Exports and fixed investment account for more than 80% of China's GDP, and any sudden fall in US demand would feed through into factory closures and higher unemployment in China. The initial shock would, it is feared, be compounded by a financial crisis as it brought to light numbers of under-performing bank loans.
In the short term, the government would throw money at the problem by expanding public spending. In the longer term, the solution would be to expand consumption - the mainstay of developed economies but a poor third behind investment and exports in China.
According to the commerce ministry, domestic supply exceeds demand for about 70% of consumer goods. The gap is evident at many of the new shopping centres. In Beijing's Golden Resources Mall, whose owners claimed it was the biggest in the world when it was opened in 2004, sales staff far outnumber the customers. Half of the restaurants have closed, so has the spa and beauty salon. Several chain stores have moved out.
"Business isn't what we expected," said a sales clerk at the Lancel outlet. The French handbag shop has a turnover of about £15,000 a month. "We've been open two years, but there has been no improvement." The mall's management company had to abandon a plan to open a car centre because the market is so glutted that prices have nosedived. China's factories can turn out 2m more cars than the market demands.
The mismatch between what the economy can produce and what it consumes has resulted in a big current account surplus and trade tensions with the EU over items such as bras, shoes and pullovers, and with the US over everything from textiles to steel. In June, China's monthly trade surplus hit a record $14.5bn (£7.7bn), putting the country on course to surpass last year's record $100bn annual trade surplus. With money flowing in from all over the world, China overtook Japan this summer as the country with the world's largest foreign exchange reserves. By the end of the year, its holdings are expected to pass $1 trillion.
The government is worried that the flood of money washing into an already loose credit system will add to the glut of villa developments, shopping malls, steel mills and car plants. It has ordered banks to tighten their lending policies and instructed local governments, a major driver of investment and development, to slow the allocation of land for new projects.
Wild speculators
Most analysts believe that these measures will have to be supplemented by an appreciation of the yuan exchange rate, which was partially unpegged from the dollar last year, and still dearer borrowing. But the impact of monetary policy is uncertain. Far more important and difficult is the task of reining in local authorities, which are addicted to expansion. These municipalities are the wildest speculators in China's economy. Free from electoral pressures, provincial leaders are judged on the size and growth of their economies. Many also have the incentive of kickbacks to push development projects, whatever the impact on the environment and local people's rights, and often regardless of central government instructions.
With Beijing's grip on its provinces so shaky, the talk is once again of whether China can slow gently to a more sustainable level or whether it will crash.
Morgan Stanley, the investment bank, estimates June's 19.5% surge in industrial output was the strongest since China launched its reforms. "The unbalanced growth model has now gone to excess," wrote Stephen Roach, economist and China expert at the bank. "The coming downshift in Chinese economic growth could well be a good deal bumpier than widely thought. The longer it waits, the bigger the bumps."
Stephen Green, of Standard Chartered Bank, believes the absence of inflation suggests China has room to grow even faster. "I think the restructuring we've seen - more private sector, more foreign investment, more openness - plus efforts to sort out energy bottlenecks mean the economy can grow pretty fast without inflation. Why not 12% or higher?"
Chinese policymakers argue that the problems of growth are best solved by more growth. So far, this simple formula has worked. For more than 25 years, Beijing's mandarins have proved impressively adept at steering the economy away from major ruts. But navigation is becoming more difficult as the economy picks up pace and adds bulk. With China now more important than ever to the global economy, the rest of the world must hope that they can maintain control, or the damage will be felt far beyond the odd Shanghai luxury apartment complex or Beijing mega-mall.

Backstory
In the late 1970s, premier Deng Xiaoping began transforming China's economy from Soviet-style central planning to a market-led one. Small enterprises were allowed to flourish, foreign investment promoted and farms privatised. The private sector grew to about 75% of the economy, which has expanded at a rate of 9.4% for the past 25 years. China overtook Britain as the world's fourth-largest economy last year and is set to pass the USA by 2034. But with 1.3 billion people with an average income each of £900 a year, 150 million people live in poverty.

Damn lies and Chinese statistics

By David Pan

Asia Times 16 August 2006

GUANGZHOU - Despite Beijing's repeated warning that it would severely punish officials falsifying economic statistics, the latest figures show regional officials continue to cook the books to inflate local economic growth. According to the National Bureau of Statistics (NBS), China's gross domestic product (GDP) grew 10.9% in the first half of this year. However, the average of GDP growth rates of the 31 provinces on the mainland of China far exceeded 12% during the same period.

In real terms, the sum of GDP figures of all provinces was 804.8 billion yuan more than the national figure reported by the NBS. Data earlier released by the National Development and Reform Commission shows that every province recorded double-digit growth in the first half of this year, with 23 of them having a growth rate of higher than 12%. Inner Mongolia attained 18.2%, Jiangshu 15.4%, Shandong 15.3%, Tianjin and Guangdong both 14.4%, Zhejiang 14.1%, Henan 13.9%, Guangxi 13.6%, Hebei 13.5% and Sichuan 13.3%. Only three province reported slightly growth lower than the national rate: Yunnan, Ningxia and Gansu.

People may ask: which should be China's real GDP, the NBS figures or those reported by the provinces? "It is common in China that the mean GDP figure of provinces is higher than the national one given by the NBS," said Gao Huiqing, a researcher with the State Council's Information Center. "For some years, the provinces' mean GDP growth figures have been some three to four percentage points higher than the national ones. I believe that the latter is more reliable because the NBS is capable of rectifying the errors found in the provincial reports." Li Deshui, former NBS director, had once written to point out that the discrepancy between the statistical figures of the local and central governments, a tendency that is worsening every year, stems from the authorities' ineffective crackdown on falsification of statistics by local officials.

Analysts say the fundamental cause of such a malpractice lies in the problematic statistics system currently adopted in the country. Basically, the NBS and provinces use the same methods to derive GDP figures. Apart from some difficulties on the technical side, the main problem is in the attitude and mentality of the officials when reporting statistical figures to the central government. Many local officials tend to try to look right by cooking the figures according to their needs in order to demonstrate their performance.

The system-related causes of such malpractice are twofold: 1) Inasmuch as the GDP figure is a "yardstick" to measure the performance of local officials, there is a strong motive for them to manipulate the statistics; 2) The local governments are given the power to do so. The data that are most easily falsified by local officials are those in the category of the so-called "soft" information, such as the amount of investment. Another common falsification is duplicate calculation of industrial output, which also constitutes an important part of the GDP.

In many regions, trade figures are taken into calculation of the local GDP figures, causing it to become unjustifiably higher. The current statistics system in China is working by the principle of "diversified responsibility under a unified leadership", by which the NBS claims the nominal leadership, while the all-important matters regarding personnel affairs and allocation of financial resources are held fast in the hands of the local governments. Thus local statistics officials would be more obedient to their local governments than to the NBS.

To overcome this, Qiu Xiaohua, the current NBS director, now sets a task to screen out all false information and the bureau is working on measures for this purpose. In the hope of eliminating the possibility for local officials cooking the books, the NBS's long-term goal is to let economic statistics in any given place be calculated directly by the higher authority. For instance, economic data in a province will be directly calculated by the NBS, and figures in a city calculated by the provincial statistical authority. In a conference in May, Qiu first advocated reform in the current system, saying that the key to ending fraudulent reporting was to make statistical work independent of local governments' influence.

Analysts have pointed out that falsification of economic statistics could bring disastrous consequences for China. By falsifying figures, the local governments will suffer a credibility crisis among the public. Some social organizations may take advantage of this to spread more false information to confuse the public for their own interests, and people may also be deceived by false figures masquerading as true and scientific. Furthermore, major decisions on macro-economic policy may be led astray on account of falsified information deviating heavily from reality.

As some put it, the risky situation is just like "a blind man riding on a blind horse on the edge of an unfathomable abyss". In short, infidelity in statistics is not only a problem of expertise or technicality, nor is it just one of economics and society. It is an unmistakable symbol of unsound political ecology. As long as the performance appraisal of officials by the GDP yardstick and the promotion of officials based on economic statistics is not banished, as long as the liars and cheaters are not punished, as long as those who dare to expose officials' falsification of economic statistics are suppressed, it is impossible to get rid of statistics falsification and its disastrous consequences.

David Pan is a freelance writer based in Guangzhou.