China’s economy keeps on growing. But should we believe the figures?

China’s economic miracle was at the center of Xi Jinping’s keynote speech as he addressed foreign officials and business elites at the annual Boao Forum for Asia on Tuesday.

The Chinese leader praised the dramatic growth the country had achieved, ever since the ruling Communist Party began economic reforms and opening up of the country 40 years ago. 

In those past four decades, the Chinese economy has grown at an average of 9.5% every year. It is now worth $12.86 trillion, according to official statistics.

But should we believe the figures? 

This is the difficult part: we can’t be sure how accurate those official statistics really are. 

If you want to properly understand China’s rise — and what it means for the rest of the world — you need the right information to ask the right questions.

Here we try to unpack the problem. 

So, how reliable are Chinese figures?

The heart of the problem lies in China’s system. It is, after all, still a communist country. The economy is centrally planned and officials at all levels have to meet growth targets.

The opaque way the figures are calculated also raises serious questions. Official statistics will give one figure for the country’s gross domestic product as a whole — but when individual figures for each of the country’s 31 provinces are added up, they paint a very different picture.

In 2016 the combined total for the provinces was $12 trillion but the national total was $11.2 trillion — a difference of $800 billion.

As we shall see, there are serious questions about the raw data used, which is provided by local governments, trade bodies and businesses.

What problems have come up before?

The heart of the problem lies in the fact that economic performance has long been the key to political success, providing an obvious incentive to manipulate the data.

A 2013 study of nearly 300 city officials by the National University of Singapore concluded that those who showed progress were more likely to be promoted while those who failed to deliver were punished.

Slowly, some parts of the country are being forced to admit to submitting hugely inflated figures.

In January Binhai, a district of the northern mega-city of Tianjin, admitted that its figures for 2016 had overestimated its output by a third — the equivalent of more than $50 billion.

Last year the sprawling region of Inner Mongolia admitted it had overstated its industrial output for the previous 12 months by 40 per cent and revenues by 26 per cent.

The northeastern rustbelt province of Liaoning has also confessed to severely inflating its figures between 2011 and 2014.

In one case a county had listed revenues that were more than twice the real total.

The doubts go back further than that, however. As far back as 2007, local party chief Li Keqiang, now the country’s number two, privately told the US ambassador that Liaoning’s growth figures were “man-made.”

These examples may be just the tip of the iceberg because the suspicion remains that there are other cases we don’t yet know about.

What are the authorities doing about this?

The Chinese leadership is working to curb the overstating of economic performance in several ways:

Providing fewer incentives to fiddle the figures. The leadership has ordered officials to focus on quality not quantity when it comes to economic growth. They are now to be judged on factors such as their impact on the environment rather than raw numbers alone. President Xi has indicated that he does not want to be given fake numbers

Overhauling its accounting methods. China is still moving away from a Soviet-style system, which largely ignores the role of the services sector, towards one more in line with international norms. Progress has been slow; it began as long ago as 1985, but there are signs that central government is finally upping the pace.

Collecting more figures at a central level. Next year the stats bureau will start publishing its own provincial GDP figures, which should help redress the anomaly between national and local calculations.

How effective will this be?

The changes outlined above may still not be enough, but there are signs that the picture is becoming clearer.

Official figures may actually be underestimating the size of the economy, because the way they are calculated is thought to downplay the contribution of important sectors such as online businesses.

One change made by the National Bureau of Statistics last year, to start including research and development expenditure, actually boosted the total GDP by 1%.

The new “quality not quantity” policy when it comes to growth has also seen some provinces reducing their official figures with more likely to follow suit.

But specialists remain distrustful and use other measures to measure the strength of the economy. These range from factors such as freight transport or power generation to borrowing and e-commerce sales.

So why does this matter?

There is an obvious symbolic importance to China one day becoming the world’s largest economy.

Beyond that, when people try to measure China against the world’s other major economies they naturally want to be sure they are comparing like with like.

For example, Donald Trump has pledged to cut the trade deficit between China and America. The problem is — regardless of the politics — that the exact size of that gap is open to question. The US government says it is $375 billion, but the Chinese say it is $276 billion.

Misleading statistics also carry huge risks for the economy. China’s rapid growth has been fuelled by a borrowing spree that has funded an infrastructure boom, allowed businesses to buy overseas assets and fueled consumer spending.

Ill-conceived policy changes influenced by misleading figures could cause any or all of these bubbles to burst spectacularly.

And, just as we saw after the US financial crisis of 2007-8, this could have dramatic repercussions for the rest of the world.