“Politicians use statistics in the same way that a drunk uses lamp posts—for support rather than illumination.”

As Scottish poet Andrew Lang reminds us, statistics should be read critically. The assembly of economic results is constrained by data limitations, distorted by methodology changes and spun for political purposes. Despite these inherent flaws, it is foundational for making decisions, assessing progress and comparing outcomes across countries. The onus is on every nation to provide the most accurate data possible.

China has long been suspected of not taking this spirit to heart. Its reported economic growth has been unusually robust and smooth, leading to doubts that art is being combined with science in the compilation of economic output. Observers have generally chosen to look the other way, but heightened suspicions of incomplete or inaccurate data are adding uncertainty to what is already an uncertain situation for China’s economy.

Measurement errors are unavoidable in an economy, particularly in emerging economies as large as China. But skepticism about the accuracy of the official Chinese data has intensified. As we wrote last year, the Chinese economy has witnessed impressive growth thanks to a blend of reforms and “steroids” (government-financed investments). Over the past four decades, China’s share of the world economy has risen from 2.7% in 1980 to around 16% in 2018.

Weekly Economic Commentary - 08/16/19 - Chart 1

While Chinese policy has certainly boosted growth, recent studies suggest there has been another factor behind the impressive results. China transitioned to the United Nations’ System of National Accounts in 1993, which uses the value-added approach to measuring gross domestic product (GDP). Despite this, the country has long been criticized for over-estimating growth and smoothing out the variations in real economic data.

China’s National Bureau of Statistics (NBS), originally created to track agriculture and production in state-owned enterprises, is the agency in charge of economic accounting in China. The NBS uses the estimates of local GDP provided by local governments to arrive at official national GDP and its components. The system is rather unique when compared to an emerging market like India where all the required data points are collected and aggregated at the Central Statistics Office and used to arrive at GDP numbers.

“Chinese policymakers are well aware of the data discrepancies.”

But the devil is in the details, in this case the hierarchical structure. Though local statistical bureaus follow the NBS’ uniform statistical procedures, regional officials are rewarded for meeting growth and investment targets. This gives them an incentive to inflate output data.

That said, the NBS is aware of such biases and does adjust figures using data it collects independently. Hence, the accuracy of the final official GDP and components relies on the extent of manipulation by local bureaus, data that the NBS has and the NBS’ effort to sanitize that data.