The Fairytale of Chinese Data

The Fairytale of Chinese Data.

During one of my classes I taught at Peking University, I was delivering a lecture that included some data I had downloaded from the Peoples Bank of China (PBOC) website. A student cautiously raised their hand and asked where I had gotten the data. Trying to blend into the Chinese university system, I proudly replied “The Peoples Bank of China website.” The student looked at me sheepishly and asked “Do you believe that data?”. Not wanting to engage in a discussion about the truthfulness of PBOC data during my early days at Peking University, I turned it around and asked “you tell me. Should I?” The student who asked the question shook his head and said no like he was teaching me something everyone already knows and the rest of the class agreed.

Chinese economic data is like surrealist or cubist art: it bears a vague resemblance to the underlying subject but no connection to reality. Let me state this as plainly as possible: official Chinese economic data is science fiction. Manufactured. A figment of some party officials imagination. Bogus. As real as a 10 rmb DVD from a street vendor in Beijing.

It is a regular parlor game among China watchers to point out the number of errors in Chinese data. No less than the US Federal Reserve was the latest to point out that official Chinese data may not be what it claims to be. People have written entire books dedicated to deciphering the absolute mess that is official Chinese data. Earlier this year, Tsinghua University professor and noted China blogger Patrick Chovanec (who you should read if you don’t already) “kick(ed) up a hornets nest” when he said during a Bloomberg interview that “I was finding it harder and harder to reconcile China’s official CPI, GDP, and PMI numbers with what I was seeing and hearing on the ground.” What is more astounding is that these blatantly and obviously manipulated figures would be believed by the financial industry, journalists, academics, and the world at large even when the fraud is so glaring. Look at the latest provincial 2011 GDP figures in the figure below.

China declared an official GDP growth rate of 9.2% for 2011. Interestingly however, only six provinces out of 30 comprising 25% of Chinese population declare GDP growth rates equal to or less than 9.2%. The CNBS must have invented a new type of math to come up with these growth numbers. If GDP was reported based upon population weighted provincial GDP, 2011 Chinese GDP would be 11.8% instead. Do not however make the mistake of believing that the 11.8% number is any more real than the 9.2% number as they both come from the Party’s imagination. The CNBS conjuring the data with a magic wand couldn’t make its own numbers add.

Disturbingly and surprisingly, most people don’t realize or for some reason even care they are using completely worthless data. Let’s consider the issue of prices. The Chinese CPI data is just as fabricated as the GDP data. Let’s take one component that is easy to track over time: the CPI component of housing cost.

Let’s start with the increase in private housing according to the Chinese National Bureau of Statistics. Figure 2 comes directly from the CPI component of private housing from the CNBS dating back to the year 2000 normalized to equal 100. Consequently, 2010 equals the cumulative price change between 2000 and 2010 according to the CNBS.

According to official Chinese data, the consumer cost of private housing rose 1.5% between 2000 and 2010. That is not 1.5% annually. That is total. Official Chinese data claims that between 2000 and 2010 the consumer cost of private housing rose only 1.5%. Putting this in real terms, according to the Chinese government, the real consumer price of private housing fell 18% (using official inflation for what it is worth)!! Before I even present actual market data, as anyone who has had anything to do with China in the past 12 years can tell you: this number is absurd.

A 2010 NBER paper published in cooperation with the Institute of Real Estate Studies at Tsinghua University in Beijing found that between the first quarter of 2000 and the first quarter of 2010, a real estate price index of constant quality apartments in 35 major cities nearly tripled as can be seen in figure 3. Similar private housing price indexes in China reflect this general trend with varying numbers though all producing large magnitude increases.

While it should be noted that the private housing CPI component will not be perfectly correlated with a real estate price index, they are by no means neutral or negative. Real estate market price index increase of nearly 300% vs. a Chinese government CPI housing component nominal increase of 1.5%, you be the judge. In a period of time when, according to official sources (again for what it is worth), nominal per capita GDP or wages surged fourfold, the Chinese government publishing data that private housing cost increased by only 1.5% is comical.

To put the sheer absurdity of this number in perspective, in the US over the same time frame, the Case-Shiller Index grew at an annual rate of 3.21% with a large run up and subsequent decline while the US housing CPI grew at an annualized 2.43% with a smaller run up and subsequent decline. These numbers are both close to the annualized US CPI of 2.4% between 2000 and 2010. In other words, the numbers have some clear obvious relationship to other data that should track in some manner the official data.

Probably more important for economists than the errors or the size of the error is the systematic bias of the errors. Taking the two examples presented here, provincial GDP is systematically biased upwards while the CPI errors are systematically biased downwards. This is absolutely no accident. Communist leaders in China keep their jobs by inflating GDP numbers and fudging inflation down. However, at the national level, China has an interest in moderating its official GDP. That is why even though China has higher real GDP growth rates than other major economies like India, Germany, and the US, the standard deviation of its growth rate is much smaller.

I should emphasize that I am not claiming that China has not grown substantially for instance, but I am stating unequivocally that Chinese data should be considered a propaganda tool of the Chinese Communist Party. The reality of prices is vastly different from the official data. The realities of GDP are far from official propaganda. Citing PPP/CPI data or government proclamations on apartment vacancy rates is an exercise in futility. The problems I pointed here are easy and obvious, but there remain many more obvious flaws not to mention the problems of the underlying data. Statistical propaganda is pervasive and extends to all manner of official data. Not one corner of the Chinese data world is immune.

Here is hoping that more people outside of China realize that the statistics bureau is just another propaganda tool of the Communist Party.

Memo to Xi Jinping: Tell your statisticians to at least try to make it a little harder to point out the obvious fraud in Chinese data. This is just embarrassing for you.

Memo to Researchers and Phd Students: if you are using official Chinese data, unless your paper is about trying to get a better number or you can prove the veracity of your data, toss your paper in the circular file and start fresh. Your results and conclusions are worthless.