We’ve commented from time to time on dubious Chinese data releases. But this report from Foreign Policy reports on an interest aspect: that the statistics are not manipulated only in the normal bureaucratic manner (fudging them) but also by getting companies to change behavior so it can be tallied in a more flattering fashion.
The story contains some real bombshells: unemployment is likely 40 to 50 million, as opposed to the widely reported 20 to 30 million; the statistical manipulations are a surprisingly broad-based initiative.
From Foreign Policy (hat tip reader Michael):
In February, local Chinese Labor Ministry officials came to “help” with massive layoffs at an electronics factory in Guangdong province, China. The owner of the factory felt nervous having government officials there, but kept his mouth shut. Who was he to complain that the officials were breaking the law by interfering with the firings, he added. They were the law! And they ordered him to offer his workers what seemed like a pretty good deal: Accept the layoff and receive the legal severance package, or “resign” and get an even larger upfront payment….
Such open-secret programs, writ large, help China manipulate its unemployment rate, because workers who “resign” don’t count toward that number. The government estimates that roughly 20 million migrant factory workers have lost their jobs since the downturn started. But, with “resignations” included, the number is likely closer to 40 million or 50 million, according to estimates made by Yiping Huang, chief Asia economist for Citigroup. That is the same size as Germany’s entire work force. China similarly distorts everything from its GDP to retail sales figures to production activity. This sort of number-padding isn’t just unethical, it’s also dangerous: The push to develop rosy economic data could actually lead China’s economy over the cliff….
Pressure to distort or fudge statistics likely comes from up high — and it’s intense…
But local and provincial governmental officials are the ones who actually fiddle with the numbers… “The higher [their] GDP [figures], the higher the chance will be for local officials to get promoted,” explained [Gary] Liu.
The story then goes through a good list of distorted and certain to be exaggerated figures, then returns to an assessment:
Still, it is possible to infer the severity of the gap between economic reality and China-on-paper by looking closely at monetary policy. China’s state-owned banks dramatically increased lending in the first half of 2009 — by 34.5 percent year on year, to more than $1 trillion. This move seems intended to keep growth artificially high until exports bounce back. Most analysts agree that it is leading to large bubbles in the stock, real estate, and commodity markets. And the Chinese government recently announced plans to raise capital requirements — an apparent sign it sees the need to reign in the expansion.
For the long term, China is banking on its main export markets — in the United States, Europe, and Japan — recovering and starting to consume again. The hope is that in the meantime, rosy economic figures will placate the masses and stop unrest. But, if the rest of the world does not rebound, China risks the bursting of asset bubbles in property and stocks, declining domestic consumption, and rising unemployment.
That’s when the Wile E. Coyote moment could happen. Once Chinese citizens no longer believe that the economy is doing well, social unrest and more widespread worker riots — already increasing in scope and severity — are likely. That’s something that China will have a harder time hiding. And then we’ll know whether China’s statistical manipulation was a smart move or a disastrous mistake.
Although it should have been blindingly obvious, it never occurred to me that the cheerleading via distorted numbers was to promote social cohesion.
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And numbers in the west are not manipulated? Lies, damned lies and statistics!
Oh sure they do.
http://zeropointfield.wordpress.com/2009/08/07/governement-labor-statistics/
However, for China this is nothing new. You could never rely on figures as locals would make them up just to please the party bosses. As long as no one from Beijing went checking it went undetected. The new thing is only that no it is sanctioned and even demanded from Beijing. That’s called economic progress, I believe.
This article is more about keeping the moral up among the US chattering classes who read FP than about actual conditions in China.
Yves, I have enjoyed your blog for two years now. Maybe you could bring back outside contributors again. I have enjoyed the variety of views that they brought to your blog.
Yves, please don’t bring back outside contributors. No offense to them, but what makes me read your blog are *your* contributions and *your* links and comments on other people’s articles. Thnx!
I’m going to echo the two comments added so far and also wonder why more workers in the West are not fed up to the back teeth with their respective govts. Afterall, the standard of living, once private debt is taken away, is declining for many Western families. Consumer costs increase. Bubbles are formed and popped. Finance and Insurance enjoy unprecedented favour and oligopoly protections. And the future? Tax hikes to pay for the sins of others.
Trite though it is: Those who live in glass houses shouldn’t throw stones. Let the Chinese worry about themselves. Ideology is becoming more and more meaningless. The oligarchs wanted an end to ideology. They got it. Now let’s all face the cold daylight of reality. Things are bad in the West and no govt, think tank or individual has one iota of an idea how to reinvent our economies. All they are doing now is trying to consolidate asset prices in order to protect their capital and to have some scheme to invest in the future.
Where are the new industries? Where are the jobs to put people into meaningful employment? When are we going to stop turning every economic activity into a pricing paper chase? People working is an economy. People speculating is a casino.
Oh! They have plenty of ideas about how to reinvent our economies.
There are two major problems though:
1) This would require an upsetting of the present pecking order, ie. shrink the financial sector, withdraw the legal favors it enjoys etc. Not easy to do when said sector is THE big donor to the political class. Think also about fairer redistribution of the tax burden…ooops!
2) Re-allocation of capital toward productive uses, which would entail a sudden but transient decline in all standards of living. A decline in our standard of living is perfectly fine with the political class…as long as they don’t get blamed for it.
Not exactly the kind of program that’ll get you any attention in political circles.
Let them eat good news.
Dang! The better gag was mere seconds away.
Let them eat cooked data.
In China it is eventually all about “luan” (chaos), or more accurately the fear of luan.
With a few thousand years of recorded history there are more than a few instances of luan (where all hell broke loose) and it is ingrained in the culture that these instances need to be avoided.
The fear of luan goes both ways. Government fears it (and so takes actions to avoid it) and individuals fear it (and so “push” less for change than those in the west).
Never underestimate the role of “luan”.
“it never occurred to me that the cheerleading via distorted numbers was to promote social cohesion.” Read any major newspaper in Australia and all the primary headlines are boasting about how good things are. There are very few articles that question let alone analyse; who wants to disrupt consumer confidence. If the punters are scared they won’t bet, so give then selective data and the game rolls on.
@Glen,
Yep its all moonbeams around here…eh. Well at least we have something they want for the time being. What will happen when they turn the tap down or off.
Skippy…hope you not a Carlton fan or we all my get that feeling soon.
@ Skippy,
I know quite a few one-eyed Carlton supporters as it happens, and as a long-suffering fan of another club I seem to recall getting a pretty fair serve from them during the 90’s.
They’re REALLY hurting right now . . .
(* evil grin *)
Cheerleading via distorted numbers to promote social cohesion can more importantly apply to the US. It seems to me that the US is just much better at it, or the level of US financial illiteracy is much higher. Does it matter whether it is heavy handed government officials or CNBC cheerleading.
I have sensed a growing desparation on the part of the Chinese government with the various program that they have put in place. On paper, it may seem like they are just stimulus programs but there seems to be an increasing amount of coercion involved with making programs happen and the cooking of books. I wonder how long before the tea kettle boils over?
Thank God, we don’t cook books or do coercive actions in the US other than the occasional unimportant things like not including housing prices in the CPI, using product substitution in the CPI, allowing bank problem assets to count as capital at full value, forcing BoA to complete the Merrill Lynch transaction, not including AMT inflation adjustments in the Federal budget…….
Yves, I like the guest columnists that you have had. It would be useful to have them continue as regular contributors at a reduced level.
I have read other blogs from China. I asked some of the contributors how to get the unemployment figures from the official site. What they told me is: Two figures you cannot trust, 1. GDP growth and 2. unemployment rate.
The chinese citizens are required to go to the government department to register you are unemployed. However, you will never get any benefit or help from the government. Therefore, nobody is bothered to register being unemployed at the end. Therefore, never ever trust anything they claim about unemployment.
China’s surplus “savings” are at the state level. Of interest in this story is that the “resigning” workers are paid for the decision.
This modest re-distribution sustains local demand and gives individuals a bridge of time to potential future work. Contrast this with the US bailouts and stimulus where almost all funds go to financial institutions or government contractors.
While the sums are enormous, they do nothing for demand or the quotidian survival of citizens. We do have unemployment etc. that help, but the tweaking of these programs is no where near the order of magnitude of the problem they are supposed to address.
Several of the guest contributors have been exceptional. I vote for their continued appearance. I rely on your good judgement as to frequency.
I thought everyone understood that governments are inclined to cook the books. Do you recall that Boskin guy who altered the calculation of the CPI so as to limit COLA increases for entitlement programs. Greenspan jumped on the bandwagon for that little beauty.
Along these lines a trip to Shadow Stats is worth the trip.
Of course “social cohesion” and “good behavior” are the goals of the PRC cooking China’s GDP numbers….
Without the continuation of the implied-but-never-stated-out-loud bargain of “we give you power to rule and we will not dissent/speak out if you make us rich” between the leaders in Beijing and the masses, the whole Chinese economic miracle since Xiaoping’s reforms rapidly starts to fall apart.
Without the collusion between the PRC (via control of the banking system [“0% no default business loans for everyone!”]and centralized industrial control[“Capitalism with Chinese characteristics and a 25% minority interest for you, gweilo”]), China would likely already be experiencing frightening high numbers of domestic rioting from disgruntled/jobless university graduates (which have been piling up jobless since 2007), laid off employees and the impoverished rural farming population (which still far outnumbers the relatively ‘wealthy’ urban dwellers in the PRC’s coastal mega-cities). Anyone ever wonder why the Politburo made the decision to stop releasing official reports of “large scale domestic protests” in mid 2006 (which consequently had been rising rapidly even in likely understated official figures from 2003-2006).
When global consumption fails to materialize in early 2010 and beyond, the ‘complacent-for-the-moment’ masses will very likely turn China into a veritable powder-keg as the Chinese Communist Party tries to maintain its grip on power.
“When global consumption fails to materialize in early 2010 and beyond, the ‘complacent-for-the-moment’ masses will very likely turn China into a veritable powder-keg as the Chinese Communist Party tries to maintain its grip on power.”
This possible scenario should scare the BeeJezus out of any US policymaker. It would become VERY tempting for the Communist Party to “reassert” their “legitimate and natural authority” over this “province” called Taiwan. A crass appeal to nationalistic gut feelings toward the “others” is a time-tested trick of any gubmint anxious to distract its populace from the real problems.
This could spell big trouble ahead.
You didn’t think China had the world’s largest land army because it was afraid of Taiwan, did you?
“Although it should have been blindingly obvious, it never occurred to me that the cheerleading via distorted numbers was to promote social cohesion.”
In the past, the Chinese state based its legitimacy on the Emperor, and on some degree on Confucianism.
The really unique thing about the People’s Republic of China is that they based their legitimacy on Marxism! But now they no longer try to do that and justify the regime on the grounds that living standards have risen (quite a bit, actually) for the Chinese in recent decades.
The problem with doing that is that if living standards stop rising, and inevitably there will be a long economic downturn, the regime will have no legitimacy. That doesn’t mean revolution or civil war is around the corner, it is just a dangerous condition for the regime to be in. The Slavic communist states lost their legitimacy in the eyes of their publics in the 1960s and 1970s.
Everyone is now an expert on China…
And wouldn’t you say that the legitimacy of our capitalist system rests on its ability to deliver high living standards for the voting majority???
I agree with the substance of the article but strongly disagree with your conclusions. Chinese people are used to managed news and are much less wet behind the ears than their Western counterparts as far as this goes. The average potential rioter isn’t reading GNP statistics; he or she is rather plugged into a broad family net, often stretching across the country, and are getting the essentials. The Chinese worker is no pushover and recently there have been plant takeovers and other disturbances that everyone knows about there but news of which is soft-pedaled here. China’s manipulated data has, rather, 3 targets: the next-highest-echelon of the party-state; especially western investors and bankers with a vested interest; and western governments. If the latter two lost serious confidence in the People’s Republic the negative consequences for the ‘greatest creditor’ state would be dramatic.
Solution:
China opens two factories several hundread km one, produces widgets, the others dismantle widgets.
I miss Brad Setser’s blog …