New research released on Thursday of this week revealed that China's economy is likely about 12% smaller than the government's official figures indicate, validating long-standing skepticism about macroeconomic numbers coming out of Beijing. The paper, called "A forensic examination of China’s national accounts" by the Brookings Institute, was highlighted in a new FT article.

The obvious concern from this conclusion is that China's economic slowdown could be far worse than the global economy believes it to be. Even using the country's "official" numbers, its economy grew at 6.6%, the slowest pace since 1990.

The analysis contained in the paper covered 2008 to 2016, so it leaves out estimates for GDP growth for 2017 and 2018. However, if 2018 GDP was overstated by the same degree that was estimated for 2016, it would imply that actual 2018 GDP was RMB 10.8T below the official figure of RMB 90T.

The authors, led by University of Chicago economist Chang-Tai Hsieh, concluded: “Since local governments are rewarded for meeting growth and investment targets, they have an incentive to skew local statistics.”

This could be one reason that the country's provincial GDP sum has often exceeded the national figure. “Some local statistics are falsified,” the National Bureau of Statistics has acknowledged previously. In addition, in 2017, the central government accused three provinces of falsifying data. The NBS in Beijing has trouble making adjustments to inflated data that it receives from local officials, according to the research. After 2007-2008, the NBS adjustments "no longer appear to be accurate", the paper says.

Last year the NBS stated that it was going to try and get a better grasp over provincial data to help deal with these discrepancies.

Michael Zheng Song, economics professor at the Chinese University of Hong Kong and a co-author of the paper told FT: “NBS has done a lot of work to weed out the fake numbers added by local government, but it just doesn’t have enough power and capacity, nor the right incentives. It would be unfair to blame NBS for fabricating GDP numbers.”

Song said he had significant communication with officials from the NBS and tax bureau, including with former NBS vice director Xu Xianchun. “I was very worried that [Mr Xu] would be upset, but in the end, he was pretty happy. He said to me, ‘You have done serious work, and I appreciate it,” Song said.

Among other conclusions that the paper drew were:

Official data overstated growth of nominal GDP by an average of 1.7% per year between 2008 and 2016 This made the economy 12% smaller in 2016 than figured indicated

GDP growth in real terms was overstated by 2% over the same period The paper's authors are more confident about GDP data in nominal terms versus real terms

Overstatement of industrial and investment output were the most severe Data on consumption was found to be the most reliable



On Tuesday, Chinese premier Li Keqiang announced the country's GDP target would be between 6% and 6.5% for 2019.

Chen Long, economist at Gavekal Dragonomics in Beijing concluded to FT: “Factors like pollution have become much more important for evaluating local officials, so the relative weight of GDP has declined. But it’s still important — if they say 6 to 6.5 per cent, you still have to meet it."

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