What China’s Off-the-Books Figures Mean for Australia
By Eric EllisJanuary 23, 2014
“No country will ever replace China at number one in economic importance to Australia,” says a former ambassador to Beijing. So should Australia demand better financial reporting standards within – and across – national borders?
Last September, a small news item in China’s official media, that in less skittish economic times might have sailed through unremarked, revealed a disturbing truth about this suddenly most essential of nations – that too often its official statistics are bogus.
Portents and truths sprung from China in recent times include the New York Times’ coverage, and our own story in collaboration with the International Consortium of Investigative Journalists (ICIJ) which exposes the ill-gotten fortunes of China’s faux-communist leaders. But among the more revealing of tales for anxious economic crystal-ball gazers is this one from China’s remote southwest.
In a rare, perhaps even unwitting, moment of candour, the state news agency Xinhua described how the good burghers running Luliang county in far-flung Yunnan Province had been very naughty. And dumb too, in being caught being naughty.
Xinhua explained how China’s official National Bureau of Statistics (NBS), an institution whose quality of bookkeeping hasn’t always enjoyed the most dependable of reputations among China watchers, had discovered a “serious case” of fraud among the economic statistics filed by Luliang officials to their masters in faraway Beijing.
So far so, well, so what? Since Mao’s Great Leap Forward, provincial mendacity about how well the boondocks are doing, and how communist party edicts made in Beijing backrooms are dutifully obeyed, has long been a national sport in China.
For ambitious apparatchiks anxious to be seen singing to Beijing’s hyper-growth tune, fudging the facts is a convenient tactic for getting noticed, getting promoted, perhaps even getting richer. And distant Luliang is a long way away from China’s main action, closer to Bangkok than to Beijing, nearer to Hanoi than even to Chongqing, the booming one-time bailiwick of disgraced party pin-up, Bo Xilai.
But even by the standards of China’s notoriously elastic official numbers, Luliang’s overstatement was a doozy.
Some 28 local companies had reported what appeared to be a healthy 6.34 billion yuan increase in industrial output over 2012, a stellar performance that Luliang county officials passed on to approving higher-ups. In the first half of 2013, another 25 companies booked 2.74 billion yuan worth of work, claimed Luliang.
In step with many other Chinese provincial counties, Luliang seemed to be thriving. Importantly, Beijing’s economic edicts were being out-performed. China’s spinners are happy to deploy such outlier heartwarmers to illustrate that prosperity isn’t just a city or coastal phenomenon, but that the party delivers its mandate of heaven for all Chinese.
But when a more assertive NBS decided to crunch the numbers around Luliang Inc, it turned out that the real figure for 2012 output was about 56 per cent lower than the county had officially reported. In 2013, Luliang’s fudge was even more outrageous – the NBS found that just 39 per cent of the officially recorded industrial output number was the grimmer reality.
Chinese outposts are also required to report their inward investment numbers, and it turned out that Luliang had faked those as well. Local companies described how they had been “coerced” by county functionaries to inflate their numbers, because if they didn’t “their reports would be returned by local government departments”. Far better for all, it seems, to nod off a dodgy report than a correct one; better numbers mean bank loans can more easily be secured.
Glossed-up numbers, easy bank loans, spiralling debt; at about this point, places like Luliang start sounding rather like Middle America circa 2007-08, just before the sub-prime loan meltdown kicked in.
Official window-dressing has been refined to a careerist art in China. China’s long-ruling Communist Party, with its 82 million-plus membership – near equal to the population of Germany – today resembles less an ideological movement than it does a chummy chamber of commerce to be navigated to personal advantage. The mendacious mandarins of Luliang simply did what has often come easily to too many Chinese officials – they made stuff up.
Indeed, as Xinhua wrote, “the National Bureau of Statistics did not specify the reasons behind the county’s faking of data but it is a well-known fact that local government leaders are assessed for their performances based on economic data”.
And lest one believe that such fabulism was a one-off, Xinhua put readers straight: “Nice-looking data sheets mean promotion opportunities,” it noted. Xinhua didn’t elaborate on what has become of Luliang’s perfidious penpushers, but one suspects a round of enforced “re-education through labour” may loom in their immediate future.
China’s one-party system, increasingly built on upstream patronage and personalities, doesn’t help to mitigate such practices. With uncommon exceptions, it sorely lacks the self-cleansing checks and balances of a sceptical media, of genuinely independent law enforcement and regulation protected by robust regional and national parliaments and institutions. Although bodies like the modernising NBS are developing teeth and steadily being reformed, the starting point – the current benchmark of transparency – is low. Even new Premier Li Keqiang once famously warned that China’s “man-made” GDP numbers should only be read “as a guide”.
This matters because of the many groups who rely on official Chinese information and must work with what’s served up to them — economic and business analysts and decision-makers of important trading partners such as Australia whose national forecasts, budgets and futures crucially depend on a China’s sustained economic health.
Perhaps more credulously, they are also expected to accept that after barely a generation of xiahai (to ‘jump into the sea’, meaning to go into business), China Inc follows world’s best practices for ensuring the accuracy of its official data, as filed in company prospectuses, as reported to stock exchanges, and as provided to the International Monetary Fund et al.
No-one likes a party pooper, though, and China’s rubbery figures mattered less while the wider global economy was motoring along, and everyone was getting richer. But times changed and the trans-Atlantic financial crisis from 2008, and Europe’s sustained stagnation since, is seeing the end of such magnanimity. China is now a crucial driver of global growth, and important people are starting to demand better standards.
A year ago the American Congress’s influential US-China Economic and Security Review Commission published an extensive study into China’s dodgy numbers, that was hardly complimentary. “The reliability of China’s statistics is also a crucial challenge for the world economy,” it wrote. “Because China is now the world’s second-largest economy, and is suffering from economic imbalances, the debate carries more weight than in the past.”
The commission noted that Beijing’s “attempts to conceal the poor quality of air in China’s largest cities, and the subsequent loss of public confidence in the government’s credibility, illustrate the pitfalls of official mendacity.
“China remains a very open economy heavily reliant on both exports and imports,” the US government study also said. “It is also the primary destination of foreign direct investment worldwide. Countless firms, not to mention their shareholders and creditors, depend heavily on accurate statistics to make decisions.”
But Geoff Raby, a former Australian ambassador to Beijing, cautions against getting too antsy about China’s official statistics.
“More importantly, the broader trend-line analysis is in the right order of magnitude,” he says, adding that Luliang-style fudges are immaterial in the wider national analysis. “I tend not to bother with provincial data. The simple self-evidently supportable fact is that the broader Chinese economy is twice the size as it was seven years ago and is tracking to double in size every decade. That’s what really matters to economies like Australia.”
Raby is now on the board of resources billionaire Andrew Forrest’s Fortescue Group, one of Australia’s biggest exporters to China. He admits he’s been “a self-confessed China bull for 30 years – and I’ve been right to be one”. Even so, as Australia’s man in Beijing, Raby often met with the NBS and with senior economic decision makers who were inquiring after the official numbers. “Much as many outside China like to talk it down, as if there is some national confidence trick underway, the people that matter are very much aware of what is going on, and they do their checking. It’s not like these people wander around with their eyes closed.”
He says China is “several diverse economies” taken as one. “People forget that China remains in many respects a poor developing economy.” In mature sub-economies such as Shanghai, for example, growth is around three to four per cent – levels more in keeping with advanced economies – while in backward areas, growth is ticking along in double digits. “The gaps are being filled in,” Raby says.
Since 2007, around the time Raby became ambassador, China has vaulted to the top spot on the league table of Australia’s export partners. In 2012, China bought 31.6 per cent of Australia’s exports; $84.635 billion in products, and some $78 billion of that designated as ‘goods’, which really means the iron ore and coal extracted by Rio Tinto, BHP-Billiton and Fortescue, among others. In 2007, a year former Australian Treasurer Wayne Swan refers to as ‘Mining Boom Mk I’, Australia sold $23.8 billion in goods to China, which was almost a fifth more than in 2006.
Today, China buys three times the value of Australian exports than it did six years ago. China’s increasing importance to Australia’s economic prospects broadly mirrors the period since the global financial crisis that felled the still-stricken Atlantic economies. Swan cites his massive fiscal-stimulus package of 2008-2010 as the panacea that shielded Australia from the GFC, but it was handy to also have a similarly stimulated China – ‘Mining Boom Mk II’ – booming into the national hip pocket.
But how much longer can Australia rely on Chinese demand? In recent months, it’s become de rigueur among international economists to predict the China bust – much as it was, just a year ago, to forecast when a thrusting China would take over from the US as the world’s biggest economy. Back then, the venerable magazine The Economist even turned China’s march to the top of the global economic table into a game, and challenged the bearish American economist Michael Pettis of Peking University to bet on when it would happen.
Now the experts are lining up to portend gloom. Billionaire investor George Soros argued last week that China has taken over from Europe as “the major uncertainty facing the world today”. Today, there’s more criticism of the country’s rotten stats as pundits fret about how China’s economy is unbalanced, with way too much emphasis on asset investment; and about the resultant alarming rise in official municipal debt, now massing around $3 trillion (some $1 trillion less than Beijing’s foreign reserves); and that too much of the country’s money is secreted off-the-books in China’s ‘shadow banking sector’, or concealed by unreliable numbers.
“[China’s] growth model responsible for its rapid rise has run out of steam,” Soros wrote.
The IMF warned last October that Australia’s was the most vulnerable economy, apart from that of China’s neighbour Mongolia, to a China slowdown. Australia got another reminder of its heightened exposure when Beijing claimed slightly lower growth in GDP of 7.7 per cent in 2013, almost its slowest year since 1999, which prompted the Australian dollar to tumble.
Nouriel Roubini, the New York University economist widely credited with having predicted the 2008 meltdown, frets about asset bubbles, while the well-followed former Morgan Stanley economist Andy Xie argues that a hard landing for the Chinese economy will ultimately be healthy. And that China will eventually overtake the US, just later than most had expected, if the numbers can be believed.
Swan and Raby, two of the Australians most intimately involved in monitoring China’s economy, agree that such gloom is mostly ill-founded – a “phase pundits are going through”, as Raby puts it.
Raby says the municipal-debt drama that has China watchers fretting is ultimately sovereign debt that is “more than covered by the state’s capacity”. The emergence of the shadow banking issue simply indicates how China’s conventional – Raby says conservative – banking industry isn’t responding to market demand.
Raby admits that if China’s slowdown does turn into a hard landing, Australia will be affected, and “our living standards could face a big cut”. But his view of the China horizon doesn’t include that. China is now Australia’s leading trading partner, and that’s irreversible, Raby says; “No country will ever replace China at number one in economic importance to Australia.”
Raby adds that China’s challenge now is to nail its re-balancing between investment and domestic consumption as its economic driver and, yes, smarten up its books.
Australia’s best defence against a future, sputtering China, he says, “is to make China as dependent on us as possible”.
Clarification: The article has been updated to reflect that Geoff Raby is an independent director of Fortescue, whose role is to provide advice and leadership to Fortescue independently from its management.