• STRATFOR GEOPOLITICAL DIARY

    China moves toward greater transparency

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    China’s National Bureau of Statistics announced Wednesday that it is changing the way it calculates quarterly gross domestic product figures to better reflect more short-term changes in the Chinese economy. China has long been suspected of politically manipulating its reported economic figures, so the accuracy of China’s GDP figures has always been questionable. Most recently, China’s reported growth of 7 percent in the second quarter of 2015 has come under question, with most analysts believing the true figure might have been lower.

    China has been making significant strides toward transparency in its statistics reporting and standards, but it is still a developing economy, and many parts of its data collection and analysis institutions are not as well developed as their Western counterparts. Regardless, Beijing is trying to improve the perception of its statistics. This latest push to revamp its data collection, national accounts calculations and data dissemination standards serves dual purposes.

    First, China is attempting to gain international credibility and market confidence in its national accounts figures — prerequisites for the long-term health of China’s financial liberalization. At the last G-20 summit in November 2014, Chinese President Xi Jinping announced his country’s intention to bring its statistical standards in line with the International Monetary Fund’s Special Data Dissemination Standard. Many of China’s recent moves to make its financial system more transparent and open, such as its yuan currency regime, have been aimed at establishing China as a global power in the Western-dominated global financial system.

    Second — and perhaps more important domestically — China’s drive to clean up data collection and standards are for Beijing’s benefit. It will help Beijing keep better records, and bolstering its transparency to markets will be necessary for some of Xi’s planned reforms. China is continuing to move away from its export-oriented economic model toward one focused on liberalized financial systems and domestic consumption. The new model will require more diligent management of the economy and, in turn, a more robust system of statistics and data standards. China’s transition is delicate, and managing the social tension that accompanies it will also require accurate information.

    Data collection still depends on state enterprises
    The challenge of data collection is not new for Beijing; Chinese officials have long tried to reform the country’s statistical offices to better collect and calculate economic data. Modern-day China grew out of the centralized, planned economic system inherited from Mao Zedong. The system required keeping data confidential and suppressed the dissemination of statistics to the Chinese public to maintain social cohesion, ease tension and restrict the Chinese people’s connection to the international community. The main means of collecting data and details was straight from China’s state-owned entities.

    China’s economic growth after Mao included the quick expansion and creation of numerous locally owned and small companies. A number of different sectors developed rapidly, making direct reporting through state-owned companies insufficient. China did not — and in many ways, still does not — have sufficiently developed institutions to adequately collect data and quickly measure the economy in less direct ways.

    Even though China has made substantial strides since the 1990s, its collection still depends on state-owned enterprise reporting and other direct monitoring methods. This has severe limitations, considering the growth of China’s economy outside of the state sector. Perhaps the most confined statistic has been China’s quarterly data, which up until now only measured activity in 17 sectors — as opposed to 94 sectors comprising its annual data — because of China’s finite ability to measure the other sectors more frequently.

    Corrupt local-level reporting
    One of China’s biggest challenges to implementing statistics practices, if not all policy measures, have been localities and municipalities. Local-level statistics and reporting, both from governments and companies, have often been corrupt. In China’s socio-political system, moving up in the Communist Party of China has historically depended on the performance of an official’s company, municipality, province or other entity. Manipulations of figures, over-reporting and other inaccuracies, subsequently, have in some ways been incentivized at the local level as politicians try to overstate their performance. Inaccurate and corrupted data also means that policy making, whether at the central or local levels, is never fully informed by accurate information.

    The extent of China’s success in limiting this behavior is an open question. Beijing moved away from using economic performance as a springboard for local politicians looking to move up in the Party. Moreover, China’s crackdown on corruption has made clear the dangers of continuing corrupt acts, though some will still take the risk. Even with these measures in place, concerns have led national, provincial and municipal governments to set up their own data collection offices. While the offices in some of China’s most important and wealthiest provinces and municipalities are budgeted and staffed adequately, this is far from true across the country. China has also employed more auditors and has put into place robust auditing standards that are becoming more important as China tries to be more diligent with its lending and as more Chinese companies list on either domestic or international stock exchanges.

    It would be impractical to expect any developing country, especially one as large as China, to have the institutions and mechanisms in place to measure its economic performance as accurately as its more developed counterparts, such as the United States. And though Beijing has been working to bring its data’s reliability up to international standards, as we have seen in China’s stock market manipulation during the past four months, there is an extent to Beijing’s gestures of transparency, sometimes with important social ramifications. However, the National Bureau of Statistics’ announcement looks like another step toward transparency, openness and accuracy. If the country’s economic transition becomes a hard landing, Beijing will use all of the tools at its disposal to manage it, and this will require the most accurate and uncorrupted data it can get it hands on.

    © 2015, Stratfor Global Intelligence

    Publishing of this article by The Manila Times is with the express permission of Stratfor.

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