Like in many other emerging-market economies, China's official economic data leave a lot to be desired. Foreign companies considering a China play involving inward-bound investments need to ponder this fact with great care. Beijing should also come to the realization that economic numbers provided by governments require the same conditions of transparency required of private enterprises.
Trapped in the mind-set established under central planning, Chinese officials tend to offer numbers to make the central authorities happy instead of offering accurate data. This is evident in a report by China's National Bureau of Statistics that uncovered more than 62,000 violations of regulations on collecting and compiling economic figures in 2000.
Only Chinese data on the money supply and trade are considered reliable because they can be cross-referenced against data from trade partners. Meanwhile, fundamental measures like GDP growth and unemployment figures are of dubious quality.
The official unemployment rate is wildly understated by counting only the registered unemployed in the cities. The entire rural population and many blue-collar workers like those put on temporary leave because of poor performance of their enterprises are left uncounted. And only workers that are recently laid-off are counted while those engaged in new job searches are not.
From 1995 to 1999, the number of state-owned enterprises engaged in industrial activities fell to 60,000 from nearly 100,000. Yet the number of unemployed workers in urban areas during that same period rose from 2.9 percent to 3.1 percent. More recently, reports of over 5 million workers being shed by state-owned enterprises resulted in only slightly larger increases the reported jobless rate for urban areas, from 3.1 percent to 3.6 percent.
Data on GDP are scarcely better. Although China has a less advanced system of national income accounting, it quickly released final numbers on last year's growth that indicate growth of 7.3 percent. Not only do these figures defy the logic of an ongoing global slowdown, they do not appear to be internally consistent. A frequently cited inconsistency is that the usage of electrical power suggests substantially less would be consistent with the official growth estimates.
China has become the second-largest recipient of foreign direct investment in the world, after the US. Foreign investors rely heavily upon data recorded by local statisticians concerning market conditions. So legitimate questions arise whether billions of foreign-investment dollars were spent wisely. A partial answer is that the wide majority of foreign investors either loses money or is far behind in its projections on return on capital.
Without reliable and independent corroboration of official data, a useful rule of thumb should be applied to authoritarian regimes. This is to double the numbers relating to bad news and halving those that report something good. This would put the actual economic growth closer to 4 percent or possibly less.
Even this might not be enough of an adjustment. Some outside observers estimate that China's actual urban unemployment is closer to 15 percent or even 20 percent.
Beijing has openly recognized the need for improved data collection and processing and has employed foreign consultants to oversee the development of such methods. The National Bureau of Statistics has agreed to adopt data systems recommended by the IMF.