GDP – the Asian Crisis and the 1998 Controversy

During the heady days of the global financial crisis scrutiny of China’s GDP figures was intense and controversy widespread. Two incidents illustrate best the difficulties faced by the NBS during a crisis.

The first, in 1998, the Asian Financial Crisis, brought the region’s economy to a calamitous halt. Fortunately, in its advantage China had a closed capital account which protected it from the speculative attacks that crippled its neighbors such as Thailand, Indonesia and South Korea.

But with its major trading partners sliding into full scale recession it was not possible for China to stay immune. Falling energy consumption and a massive decline in air travel, and imports all indicated China must be in the throws of a slowdown. But not according to the NBS.

Official data showed that GDP had merely dropped 0.2% below the talismanic 8% mantra to 7.8%. A drop of only 1% over the previous year.

Obviously this figure generated a massive degree of skepticism among economists and analysts around the world with some of the more cynical insisting the reduction in airline numbers and output of key products like steel and cement meant growth was much more likely between -2 and +2%.

The government has never admitted any error in the data and in fact doubled down in the aftermath with the 7.8% figure the only one that remained unamended after the 2004 economic census. Although several stories leaked about a burst of over enthusiasm by local officials

In truth, caught between a financial catastrophe and the realities of career progression officials engaged in rampant falsification at all levels. Zhu Rongji himself was once quoted as speaking of ‘a wind of embellishment and falsification that swept through the corridors of the NBS.

The wake of the 2010 Wikileak cables added credence to the skepticism when Li KeQiang – the premier-in-waiting – reportedly told the US ambassador that he considered provincial GDP data as essentially ‘manmade.’ And that he steered the economy of Liaoning Province by relying on electricity consumption, rail cargo volume, and bank lending data.

Li Keqiang
Vice-premier in waiting at the time.

In the following years more data was reported directly to the NBS, bypassing local government officials with more checks and balances introduced into the process. In addition, the statisticians introduced a measure called ‘adding a little water’ in Chinese to curb the more exuberant estimates. But local level GDP accounting, especially in the less economically developed regions remains problematic.

Another problem is the unshakable difference between locally reported, provincial level GDP, and the national total. In a mathematically accurate world these numbers should add up to be the same. But regional distortions remain.