China’s GDP growth has been overstated by an average of 1.7%, says new research

• China’s local governments have overstated local GDP figures, as they are rewarded for meeting growth and investment targets
• China’s National Bureau of Statistics has not done enough to correct the misreporting by local governments since 2008
• Two different approaches have been used to estimate GDP, which came to roughly the same conclusion

The economic growth in China may be lower than the officially published figures suggest, according to a recent research paper published by the US-based Brookings Institute. The paper, titled "A Forensic Examination of China’s National Accounts", concludes that China’s gross domestic product (GDP) growth rates had been exaggerated by about 1.7% on average every year from 2008 to 2016, and the aggregate investment and savings rate for 2016 was 7% lower lower than official figures.

“Since local governments are rewarded for meeting growth and investment targets, they have an incentive to skew local statistics,” the authors - Chen Wei, Chen Xilu and Michael Song from the Chinese University of Hong Kong and Chang-Tai Hsieh from the University of Chicago – wrote in the draft paper.

China’s National Bureau of Statistics has not done enough to correct the misreporting

China’s national GDP figures are based on data provided by local governments. China’s National Bureau of Statistics (NBS) acknowledged that local governments have misreported local GDP figures, and has been using data from their own economic censuses and administrative data to adjust the local figures. Since 2003, national GDP figures the NBS has produced are lower than aggregate provincial data, as local governments have inflated local GDP statistics, particularly by overstating industrial output and investment.

However, the study reveals that local governments increasingly exaggerate local GDP after 2008, but the NBS has not done sufficiently to correct the misreporting by local governments. The authors used two approaches to probe the accuracy of the NBS’s adjustments to local GDP figures .

China’s economic slowdown may be worse than the official statistics suggest

Figure 1. China’s real GDP growth

Source: Chen, Chen, Hsieh, and Song (2019). A Forensic Examination of China’s National Accounts

Two different approaches have been used to estimate GDP

One method was comparing the official numbers to GDP estimates based on value-added tax (VAT) revenue growth reported by the State Administration of Taxation. Local governments have fewer incentives to manipulate VAT revenue, as overstating VAT revenue would increase local fiscal revenue losses. Furthermore, this is supplemented by a statistical modeling for measuring GDP growth using several local economic indicators that are relatively immune to human manipulation. The indicators include satellite night lights, national tax revenue, electricity consumption, railway cargo flow, and trade flows.

The two approaches reached roughly the same conclusion. The findings of the research indicate that the actual size of China’s economy was 12% small than the government’s official data presents at the end of 2016. Meanwhile, If the GDP growth in China was adjusted in line with the paper suggestion, the debt to GDP ratio in China would be 240% in 2016, compared to the official number of 210%.

It’s not the first time that the accuracy of Chinese official economic data has been questioned. The authors suggested that much of the underlying data behind the national accounts is outside the NBS’s control. The NBS has taken efforts to collect local economic data and has named some local governments on its website for falsifying data, which do not appear to be solving China’s GDP data problems.

The research fuels growing concerns about the health of China’s economy, especially when official data showed China’s GDP growth dropped to 6.6% in 2018, the lowest since 1990, and the government has lowered its growth target for 2019 to a range of 6 to 6.5%, down from “about 6.5%” last year. More efforts are needed to improve the quality of China’s economic data. The NBS will collect more local data itself, and it will calculate provincial GDP growth from this year.