Sun, Aug 20, 2006 page8

• Lies, damn lies -- and Chinese statistics

  • By Paul Lin 林保華
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  China's GDP grew by 10.9 percent in the first half of this year and by 11.3 percent in the second quarter. These figures stunned analysts.

  A catch phrase in China says that "numbers make cadres and cadres make up numbers." That is, impressive numbers can promote a party cadre, who can then use his or her power to make up desirable numbers. This interaction between cadres and numbers goes on today: The GDP figures reported by local governments do not match the national GDP.

  Even more frightening is fixed asset investment. Generally speaking, 25 percent growth in fixed asset investment is adequate to sustain normal economic development. However, China's grew by 31.3 percent in the first half of this year, pointing to an overheated economy.

  Yi Xianrong (易憲容), a Beijing-based economist, quoted statistics released by China's National Development and Reform Commission, which said that fixed asset investment increased by 55.6 percent in Jilin Province, 54.1 percent in Anhui, 48.8 percent in Henan, 44.4 percent in Hebei and 43.5 percent in the Inner Mongolia Autonomous Region. These figures exceed the average figure released by the central government by far, making it clear that national figures were doctored.

  Back when the government was trying to push economic growth to 7-8 percent per annum, officials at every level exaggerated figures to ensure promotion. Once the economy took off, local government officials worried that the central government's macroeconomic controls would hurt their economic interests and so reduced the figures they reported.

  The regular approach to managing an overheated economy is to rely on monetary policy and raise interest rates. However, China is facing a unique situation. Over the past two years, officials have warned that the economy is overheated. In April, China's central bank raised its one-year lending rate by 0.27 percentage points for the first time in 18 months. The government's decision to raise only the lending interest rate was aimed at maintaining the policy of stimulating domestic demand.

  Why have the authorities kept their foot on the gas? First, many state-run enterprises subsist on bank loans. Increasing interest rates will only make things more difficult for them by increasing bad debt and in turn creating problems for the whole nation.

  Second, only rapid economic development and massive investment enables corrupt officials to ply their trade, particularly those officials who approve loans.

  In the end, the government can do nothing about its overheated economy but let it continue until the bubble bursts. Chinese Premier Wen Jiabao's (溫家寶) lament that "government decrees don't spread beyond Zhongnanhai" captures Beijing's predicament.

  For the first half of this year, investment in real estate development accounted for 18.2 percent of overall fixed asset investment. If Beijing fails to cool down the overheated real estate sector, it will also be difficult to cool down the overheated economy. Real estate markets, however, are booming at the local government level, making it easy for corrupt officials to make huge profits.

  Repeated adjusting of macroeconomic policies means less profit, and therefore foreign investors are made to suffer instead -- as demonstrated by Beijing's decision to impose restrictions on foreign investment in the real estate sector.

  If China continues to refrain from political reform and is unable to solve longstanding economic problems, the economy will one day implode. If that happens, foreign investors will become scapegoats or be forced to help Beijing weather its difficulties. This will apply in particular to those who are now leading the drive to invest in China's state-run enterprises.

  Paul Lin is a political commentator. Translated by Daniel Cheng
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