One month ago, in delightful, if anticipated, confirmation that much if not all of China’s data has been cooked and fabricated as so many skeptics suspected, we reported that according to the People’s Daily, the rust-belt province of Liaoning had admitted to fabricating fiscal numbers from 2011 to 2014. The fabricated economic data was meant to show a state of economic strength with fiscal revenues inflated by at least 20%, and some other economic data were also false, the paper said, without specifying categories.In short, the fabrication opened a hornet’s nest: if one Chinese was doing it, then why not all, and by how much was the real data off?
But why manipulate the numbers to paint a rosier picture? For obvious reasons: the data were made up “because officials wanted to advance their careers.” The fraud misled the central government’s judgment of Liaoning’s economic status, he said, citing a report from the National Audit Office in 2016.
Yet while it was this confirmation of data fraud was gratifying, what was absent was the scale of the fraud, as having the real and fake numbers would provide a useful rule of thumb into just how cooked all of China’s books are, not just those in Liaoning. Conveniently, today we got the answer courtesy of the FT, which reported that the economic output of the province in question shrank by 23% in nominal terms last year, according to official statistics, showing the extent to which officials had previously exaggerated performance in China’s struggling rust-belt.
The sudden drop in provincial gross domestic product is only partly due to a fall in the real economy: in inflation adjusted terms, GDP fell by 2.5 per cent according to the national statistics bureau. The rest was undoing the book cooking: “The main reason for the decline, analysts say, was officials’ attempts to undo the effects of previous over-reporting.”
Further evidence of data fabrication can be seen in Liaoning’s fixed-asset investment figures, which fell 64 per cent in 2016. China International Capital Corporation, a partly state-owned investment bank, said the drop in investment raised doubts about previous years’ figures.
The Lianoing scandal also appears to have convinced even those not overly skeptical, that no Chinese data can be trusted going forward.
“The sharp decline was not only a result of economic downturn but also reflected the correction of its previously inflated data,” wrote CICC last week.
“Liaoning have had stark issues with their data over the past few years. Does that mean other provinces do too? That’s definitely the case — provincial GDP is always higher than national GDP,” said Jonas Short, head of China research at NSBO, an investment bank.
It gets more ironic: the current Premier Li Keqiang was the top official in Liaoning from 2004 to 2007, and once decried GDP data as “man-made” and therefore unreliable. Instead, he preferred three indicators of industrial activity: electricity consumption, railway cargo volume and loans extended by banks. However, such indicators are less relevant to measuring China’s economic output now that the dominance of traditional industries is fading.
While it is still too early to extrapolate, if all of China’s data is “overcooked” by 20%, assuming the country’s debt statistics are reliable, it would mean that instead of 300% as per the IIF’s latest estimate, China’s real debt/GDP is roughly 375%, and fast approaching the world record holder, Japan, which remains untouchable at 400%. The implications for the global economy and capital markets – once a bubble of this magnitude bursts – hardly need elaboration.