How Badly Flawed Is China’s Economic Data? The Opening Bid Is $1 Trillion by SSRN

Christopher Balding

Peking University – HSBC School of Business; ESADE University Faculties – ESADEgeo

August 14, 2013

Abstract:

Baseline Chinese economic data is unreliable. Taking published National Bureau of Statistics China data on the components of consumer price inflation, I attempt to reconcile the official data to third party data. Three problems are apparent in official NBSC data on inflation. First, the base data on housing price inflation is manipulated. According to the NBSC, urban private housing occupants enjoyed a total price increase of only 6% between 2000 and 2011. Second, while renters faced cumulative price increases in excess of 50% during the same period, the NBSC classifies most Chinese households has private housing occupants making them subject to the significantly lower inflation rate. Third, despite beginning in the year 2000 with nearly two-thirds of Chinese households in rural areas, the NSBC applies a straight 80/20 urban/rural private housing weighting throughout our time sample. This further skews the accuracy of the final data. To correct for these manipulative practices, I use third party and related NBSC data to better estimate the change in consumer prices in China between 2000 and 2011. I find that using conservative assumptions about price increases the annual CPI in China should be adjusted upwards by approximately 1%. This reduces real Chinese GDP by 8-12% or more than $1 trillion in PPP terms.

How Badly Flawed Is Chinese Economic Data? The Opening Bid Is $1 Trillion – Introduction

Since China opened up to the world in 1979, it has been an economic juggernaut, officially expanding by a compounded growth rate of 10% between 1980 and 2012. This rate actually accelerated after 1999, averaging 10.2% from 2000 to 2012. China has pulled hundreds of millions of its citizens out of extreme poverty becoming one of the world’s largest economies.

However, there is strong evidence indicating that the rate of real Chinese GDP growth and ultimately total real GDP may be significantly over stated. This discrepancy stems primarily from significant and systematic irregularities in the inflation data maintained by China and the pass through impact on a wide variety of other data such as real GDP and disposable income. If inflation data is not accurate, or is willfully fraudulent as appears to be the case, it will impact many other areas of economic and financial data leading to large disparities over time.

Though there are undoubtedly other irregularities within Chinese inflation data, the focus of this paper is the discrepancy around price changes in the cost of housing. The cost of housing is normally one of the biggest single line items in many national price baskets. Consequently, changes in its composition will have a disproportionate impact on the calculation of real GDP relative to other items. There is strong evidence that China has systematically manipulated its housing price data in order to lower official inflation which, using conservative estimates, has lowered annual inflation by approximately 1%. Over this time frame, this would conservatively reduce real Chinese GDP by approximately 10%.

Furthermore, this irregularity in the calculation of inflation may help explain discrepancies in other macroeconomic variables such as growth in money supply, nominal, and real GDP growth in China. Taken over a longer time horizon, there are discrepancies in other aspects of Chinese data that may be explained by the inflation data.

This paper is broken into three sections. First, I begin with an examination of Chinese price data focusing on the housing market. Second, I study broader macroeconomic variables including cross country data from other emerging markets and developed countries for comparison. Third, using this data and plausible assumptions, I produce an estimate of real Chinese GDP.

Chinese Housing Price Data

The National Bureau of Statistics of China (NBSC) houses the primary national economic, financial, and social data. It is publicly available in Chinese and English with monthly, quarterly, annual, and census data, including a separate portal for data searches. Within their annual data collection, in most years’ Section 9, they maintain a lot of data on prices for producers, consumers, and other areas of interest. In Table 3 under Section 9, they produce the consumer price index change with a lengthy list of major cost line items and their individual annual price changes.

China's Economic Data

China's Economic Data

China's Economic Data

See full PDF below.