Why China gooses GDP

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From JCap’s Anne Stephenson-Yang via FtAlphaville:

As with all such things in China, the appearance of operating an independent statistical system that has been “reformed” is critical; statisticians rarely resort to altering the data themselves but instead induce those reporting to them to make adjustments to the underlying data such that the NBS can achieve its goal of independence. Once, for example, while conducting our cement survey, we ran into an executive who thought we were calling from the cement association, Digital Cement, that gathers statistics for the NBS. The executive asked us to please stop asking him to change the data—he had already made changes. This happens because the NBS pays companies to participate in surveys, and giving a low-ball estimate of production is one sure way to get booted from the survey panel. Hence there is no pressure to reform but political pressure not to.

…[T]he lack of connectivity between a target GDP level and employment is amply demonstrated in the second-tier statistical data … The secondary industries and related services like freight are growing much more slowly than claimed GDP, and they are of course the major source of much urban employment. If not decoupled from employment, we would expect these numbers to ring alarms for the leadership and expect them to take little comfort in the impressive GDP declarations. In fact, it is apparent that in industries like steel, the lackluster performance has put local leaders on alert in making certain that enterprise leaders do not address their economic stress by laying off workers without proper preparations.

…Probably the most important reason for the GDP target as well as for insisting that GDP is higher than other, underlying evidence suggests is because of China’s peculiar governance system. The top-down, unitary political structure, which by design creates frailty and dependence at the local level, but is challenged with an unreliable level of fealty, relies on traditional mobilization strategies for governance.

The GDP is a key mobilization tool, and it aligns with the other vectors of direct intervention from the Center to the most local of economic activities, including the allocation of capital. Each year, after the National Development Reform Commission settles on a GDP target (called a “projection”) for the following year, State-owned enterprises and local governments across the nation make their budgets and receive the next year’s allocation of investment capital, directly and through local bank branches, based on their particular industry’s and locale’s traditional performance against GDP. Given that State companies do not really operate on a commercial basis, the GDP target creates an assurance of forward drive, forcing companies to show progress, producing whatever they produce at projected levels, irrespective of actual demand.

A key category on the scorecard is production levels achieved. There is no box to check for bloated finished-goods inventories, and they are hardly a problem for anyone if they can be swapped for cash at the local bank. If expectations were set too low— if the government were to say that GDP growth would be only 2% or 3%, for example—it would be too easy for SOEs to take the investment capital on offer and go home early every day. Similarly, the target guides fixed asset investment activities for local governments and their agents, where again meeting the targets is a critical component of a local cadre’s scorecard. It’s about capital, comrade.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.