The Economy Didn't Collapse, We've Been Hiding a Depression

Global Times: Inflated statistics wreak havoc on economies of Northeast China
The practice of inflating official economic statistics has been rampant in China's three northeastern provinces. Local officials have been reflecting on the reasons for the practice, accessing the damage done to the local economies, and thinking about ways to correct their wrongdoings. The three provinces ranked near the bottom of the country's GDP ranking for the first three quarters of 2015.
I wrote Liaoning Sounds Warning on Chinese Economy in October 2014 and the data already showed a clear slowdown in economic activity, via in one case, real estate investment. What exactly was the Northeast hiding, in plain sight, except for the GDP?

We can always find a few data points that work, even if it comes from outside (such as exports/imports from a trading partner not matching up). Hopefully it extrapolates to something meaningful in the case of a mammoth economy such as China's. I don't rely on GDP for any country and prefer to use other statistics when it comes to forecasting. GDP is something economists focus on; if you're not comparing nations it is generally not a useful number except in a few cases. I used it as an undergrad in economics and it gets lots of press, but I rarely consult GDP unless its used as a yardstick for convenience such as comparing debt to GDP. I do check the Atlanta Fed's model, but even then I'm more interested in the directional change. China produces plenty of data that's clean enough and they're quite open about the economic numbers other than GDP, even in the press. One reason I started posting Chinese news and blog posts was because foreign media sounded very bullish on China in recent years, but the domestic press was quite negative at times, which contradicted both the prevailing opinion overseas and the strong-form claims of media censorship (at least pertaining to economics).

There's a real economy out there regardless of what a made up GDP number says. Imagine there was no GDP reported at all, there is still a real economy expanding or contracting. The price of commodities today, with some speculative variation, largely reflects the underlying economy. Imports by China's trading partners are real too. In contrast, GDP is in all cases a man-made number, one that is mainly useful to central planners. To wit: Freedom Works: The Case of Hong Kong
The laissez-faire attitude of the Hong Kong government on economic matters was cemented by Sir John Cowperthwaite, the colony’s financial secretary from 1961 to 1971, whom Welsh called a “political economist in the tradition of Gladstone or John Stuart Mill” and the personification of “unreconstructed Manchester-school free traders.” Cowperthwaite had almost complete control of Hong Kong government finances and used it to implement his policy of “positive nonintervention.” Friedman gave Cowperthwaite a great deal of the credit for Hong Kong’s success, citing approvingly Cowperthwaite’s refusal to collect most economic statistics on the grounds that “[i]f I let them compute those statistics, they’ll want to use them for planning.” Jimmy Lai has a bronze bust of Cowperthwaite at his company’s entrance (as well as ones of Friedman and F. A. Hayek).
This next link goes to a paper that claims there was more at work than intelligent economic planning in earlier years. Government without Statistics: Policy-making in Hong Kong 1925-85, with special reference to Economic and Financial Management (PDF).

Perhaps China could have learned something? (returning to Global Times article above):
In the three northeastern provinces, the problem is even worse, according to the Xinhua report, which said the meddling with figures has hindered both the central and local economic planning.

"Falsified statistics undercut the economy's sustainability," Zhao Zhenqi, a financial official with the Jilin Provincial People's Congress, was quoted in the Xinhua report.
Occam's Razor: the slowdown is a direct result of central planning at the central and local level. Unless they were fabricating everything up and down the line, to the point of distorting private company and bank loan data, this didn't affect growth. The Northeast is a commodity intensive economy, the industrial heartland of China. An economic rebalancing was going to hit these sectors no matter what, a major slowdown definitely would and has. As I wrote in the Liaoning post linked above:
Liaoning is more exposed to the higher stages of production and therefore is one of the provinces most likely to experience a slowdown first assuming a normal contraction phase of a business cycle. We know steel and other industrial sectors have overcapacity. Problems in steel surfaced in late 2011, but wider economic growth was not impacted until very recently, following a steady deterioration in the market for more than 2 years and then a slowdown in real estate as well.

Liaoning's slowdown could be a false signal, but it could also be the beginning of a much sharper slowdown in China's economy. Industrial production in Shanxi province, which leans more on the coal industry, also slumped in recent months. Real estate was the replacement growth source for economies experiencing recessions in their main industries; now that real estate is slowing, the remaining economy is revealed.
This was central planning! All they did in the Northeast was to have the bad luck of following the investment plan of everyone else and fail to learn from Ordos: the real estate economy is dependent on the local economy. The real estate sector can lift growth for a time, but excessive real estate development is pulling growth forward in time. Once the real estate market turns, or the credit market supplying the funds turns, the real estate sector would slow and the underlying slowdown in the rest of the economy (if it hasn't recovered) would necessitate a large drop in reported growth. Chinese planners intentionally pumped money into infrastructure and real estate in order to make up for the 2008 slowdown. A centrally planned replacement economy for the slowing real economy that itself went into recession.
One way of falsifying fiscal revenue involves local finance departments that first allocate funds to tax-paying institutions and then levy the money back, according to media reports.

The falsified figures include those for the local GDP growth, investment, consumption, exports and imports, funds spent on the renovation of run-down areas, as well as urban and rural residents' income.

"If the figures hadn't been tampered with so much, the repercussion wouldn't now be so severe," Xinhua said, quoting officials.
The only repercussion is if the government would have done something about the slowdown.
In the end of 2014, Fuxin and Huludao, two cities in Liaoning Province, faked the number of newly commissioned housing projects. The non-existent projects accounted for 52.8 percent and 29.3 percent of the two cities' total projects, respectively.
OK, but real estate investment was already collapsing. They faked data, but it failed to show up in real estate investment? Or there was even more fakery at the end of 2013? In which case the economy didn't collapse, in started contracting 2 or more years ago.


Anyone on the ground in Northeast China should have known the Northeast was in trouble earlier than Q4 2015. Local officials would not have been using fabricated data themselves. The central government would have known something was off by comparing various statistics and noticing discrepancies, which is why they were already auditing earlier in the year. Official data gave reason to see a major slowdown over a year ago at least, as covered here. The fake data is serious, but the real economy is the story and fake numbers on a piece of paper didn't have as large an effect as officials claim.

If instead the fake data is as serious as officials claim, then what do you make of the slowdown in Hunan real estate investment, which looks a lot like Liaoning one year ago and is far from a Northeast province? If the fake data goes much deeper and this is a national problem, malinvestment and bad debt are much worse than believed.

WaPo: Here’s why it matters that China is admitting that its statistics are ‘unreliable’

Xinhua: “注水数据”贻害大 “挤出水分”须较真

An oldie, but a goodie from 2004: Lies, damn lies and Chinese statistics
According to the National Bureau of Statistics, the national GDP registered 5.877 trillion yuan (US$708 billion) in the first six months of 2004, and a year-on-year growth of 9.7%. Theoretically, these data must cover China's 23 provinces, five autonomous prefectures and four provincial-level municipalities. However, if one adds up the interim GDP results released by all these 32 local governments, one gets 7.027 trillion yuan, and an average growth of 13.4%. That's just how exaggerated the reports by local governments can be.

...The nationwide statistical growth race is far too evident between regions of similar economic strength and political importance. Take two municipalities for example: Beijing declared that its 2004 interim GDP increased by 15.4% year-on-year, while the adjacent Tianjin city quoted 15.9%. Given that the former is preparing itself for the 2008 Olympic Games, its rapid GDP growth is understandable, but no one has any clue as to why Tianjin is growing even faster.

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