Now that we have chimps outsmarting college students — a finding that will come as no surprise to college professors everywhere — it’s not surprising that the numbers out of China have serious problems….

Blinded by China’s false statistics —Jonathan Power

Beware of extrapolation, a British Chancellor of the Exchequer once remarked: it can make you go blind. It’s about time this little piece of wisdom was applied to China. But there seems to be a mental block that inhabits newsrooms, academic common rooms and the bureaucracies of many governments. This is despite the pioneering research done by the likes of Professor Lester Thurow and the conclusion of long-time Hong Kong-based China watcher, economist Jim Walker, of Asia’s leading independent investment bank, CSLA, both of whom have rigorously deflated the wild claims of China’s official growth statistics, which once again recently got the big headline treatment. Walker concludes that official GDP statistics are a “fantasy world”.

In China’s provinces, the statistics are notoriously unreliable, as local officials inflate them to avoid being punished for poor management of the economy. For its part, the central statistical office calculates GDP through counting increases in value-added production even though much of its statistical information comes from state-owned enterprises that provide poor data. Walker routinely deducts 2 percent from official Chinese growth statistics. This summer, in a little noticed announcement, the Asian Development Bank lopped 40 percent off previous Chinese income per head statistics. That is some revision.

Even if we use Chinese statistics, the overall rate of progress between 1978 and 2003 is not overwhelming. In that period China’s per capita GDP grew at a compound rate of 6.1 percent. This gives an increase of 337 percent over a quarter of a century. Compare this with Japan’s, which increased by 490 percent between 1950 and 1973. Both South Korea and Taiwan have done even better the former with 7.6 percent compound growth a year between 1962 and 1990 and Taiwan with 6.3 percent between 1958 and 1990, the years when they were bursting through the industrialisation sound barrier.

The statistics we do have show up some near-insuperable problems. One is that 40 percent of Chinese bank loans are considered “bad”, a gigantic misallocation of capital. Another is that China could grow old before it grows rich. Not very long ago China was one of the world’s most youthful countries. But the one-child policy has had an enormous impact. As early as 2015 China’s working age population will begin to fall. By 2040, just a decade before China hopes to be a middle-income country, it will have 100 million citizens over 80. That is more than the current worldwide total.

Arnaud de Meyer, deputy dean of INSEAD, the European business school, author of a study on Asian innovation, writes that in relation to its huge development needs, China may already have too little skilled manpower. McKinsey, the management consultancy, reports that only 10 percent of China’s graduating engineers are good enough to work for foreign companies. It is not surprising that China’s software industry lags behind India’s because of its fragmented structure and poor management.

India is far ahead in this regard. India has “an enviable pool of high quality talented professionals”, reports a study by Mercer Human Resource Consulting. Moreover, wages among professionals are much lower in India than China. Living costs in Chinese cities are much higher than in India’s.

It is not surprising that foreign direct investment is now falling in China, albeit from very high levels (and at the same time capital flight is on a fast rise), while India’s is increasing. If one looks at the non-ethnic Chinese component of foreign investment, China does less well than booming Brazil.

US companies earn something over $8 billion a year from their business and investments in China. But they earn around $7 billion from Australia, a market of only 19 million people and over $9 billion from Taiwan and South Korea with a combined population of 90 million. From Mexico, they earn over $14 billion. Moreover, the American companies that have made big money from China are those like Wal-Mart, the retailer. They are the ones who buy from it rather than the ones who invest in it.

Angela Merkel, the Chancellor of Germany, has taken a lot of flack from China and from her Social Democratic partners in government for talking to the Dalai Lama and being vocal about Chinese human rights failings. She should have no fear - China needs Germany much more than vice-versa.

It has always been strange. It is quite pathetic that Western countries regularly betray each other, and, in so doing, the human rights activists inside China, in an effort to better position themselves in this quite modest marketplace. If Western governments could stand shoulder to shoulder and say once and mean it: “stop using economic and trade threats, you are in no position to do so, it is unacceptable behaviour”, Beijing would get the message.

But perhaps after years of propaganda on China’s “remarkable future progress”, we are already blind.

The writer is a leading columnist on international affairs, human rights and peace issues

I can’t find the original link for this article; it appears to have vanished from the Statesman’s site (A loyal reader found it).

The author is hitting solely on the negative side of things and vastly oversimplifying some extremely complex issues. Harry Wu, one of the economists at the Asian Development Bank who has been working on China’s income and growth figures, has a nice little paper that goes over some of the issues online here. To get the flavor of how truly complicated the political and economic scenario is, read these paragraphs:

Together with Figure 1 that shows no any adjustment to 1998 in the real GDP growth rate, this observation has taken us back to the hot debate in the early 2000s about the likelihood of the statistical authorities’ serious data manipulation to arbitrarily raise the growth rate for 1998 in order to meet then the government (Zhu Rongji Administration)’s growth target when China was badly hit by the Asian financial crisis. The official estimate for the real GDP growth rate in 1998 is 7.8 percent, only 0.2 points lower than the 8 percent growth target, suggesting that the target was only missed by a minuscule margin in a very difficult situation. However, this growth rate has been challenged by many researchers. They believe that it overestimated China’s real growth performance in 1998. For example, based on the change of energy consumption for 1997-99, Rawski (2001) suspected that China’s real GDP growth in 1998 was at best ranging from -2 to 2 percent. But his estimation was criticized by Ren (2002) among others for lacking sound empirical support. Other researchers used the expenditure approach (in contrast to the NBS’s value-added approach), but arrived at very different results. Keidel (2001) found that the growth rate in 1998 could be bounded by 6.9 and 7.2 percent, while Shiau’s recent results showed that it could be somewhere between 2.6 and 4.7 percent (2005). Such variations of estimates are largely due to different choices of deflators. There are also different views. Using the principal component analysis, Klein and Ozmucur (2002) find that the variation of the official GDP growth is well associated with the variation of 15 major macroeconomic indicators, suggesting that the official GDP estimates are not an outlier. Nevertheless, since the major indicators are from the same official sources that generate the information for the GDP estimation, surely no sensible inference can be made from their findings in the context of the debate.

Unfortunately, the infamous “7.8 percent” for 1998 is an important issue that NBS could not easily bypass when adjusting China’s GDP growth rate. Apparently, NBS faced a big dilemma. On the one hand, it could not systematically raise the growth rate of 1998 together with the overall upward adjustment for the whole period because that would invite further international criticism. On the other hand, it could not take this chance to reasonably make a downward adjustment for 1998 because that would indicate that they had admitted the original estimates as a mistake, whose implications would be, however, by no means purely technical. Although leaving 1998 intact in this overall upward adjustment means that the growth rate of 1998 is in fact relatively lowered, such an arbitrary treatment has made the whole adjustment less credible.

From the price perspective, the treatment to 1998 also suggests that there were some ad hoc modifications in the adjustment. But it is unclear if such modifications were made after the nominal GDP estimates were systematically deflated. Nevertheless, by assuming that the 1992 benchmark was problem-free, NBS faced more complicated price problems. This assumption simply means that the undercoverage problem is mainly due to the new products or services that only emerged after 1992. Since the growth of new products/services is very price-sensitive, their prices are usually high at the early stages and decline quickly throughout the stages of maturing. It is therefore almost impossible for NBS to introduce a new trend to adjust the original price changes in the absence of necessary price information for new products or services. Then, how did NBS solve the price problem in the adjustment? Our rather heroic working hypothesis is that NBS did not directly work on prices. It is likely that they began with a new GDP growth trend that could satisfy a certain growth target for the period in question and then followed the trend-deviation interpolation method to adjust the original annual real growth rates.

The problems are a legion — massive overreporting from the provinces — there are huge discrepancies between the national grow figures and the regional ones. Statistical inflation exists almost everywhere the Chinese economy intersects measurements — FDI figures, for example, are inflated because Chinese investors send their money out of China, then using the same system in the Caribbean that Taiwanese investors do, return the money to China as “Foreign Direct Investment” through front companies to take advantage of incentives for foreign investment. Hence the “FDI” figure for China actually has a huge Chinese component — what Powers takes for ‘capital flight’ in the article above is often funds that will come back to China. This also suggests that if the FDI incentives for Caribbean-based firms are so great Chinese recycle funds to take advantage of them, Taiwanese firms that routinely use that route cannot be suffering too much.

Also in the statistics department, Taiwan has surpassed Korea as the number 2 exporter to China. Gacck!….argh….must…not….say…anything…..

UPDATE: Taipeimarc points to this article on the coming China crash.