Early this year, China found a missing province, one doing very well for itself.  The total GDP for 2012, according to the National Bureau of Statistics, was 51.9 trillion yuan.  The total GDP figures of China’s 31 provinces for 2012 added up to 57.6 trillion yuan, giving the phantom 32nd province an annual GDP of 5.7 trillion yuan.  For many economists, this was just a shining example of what they have believed for years: that China’s GDP numbers are questionable at best, and often exaggerate China’s growth, largely for political reasons.  

In fact, in 2007, Li Keqiang, then-party secretary of Liaoning and now soon-to-be premier, said that GDP statistics were “for reference only” and “man-made,” and that for his purposes, he preferred to look at electricity consumption, rail cargo volume, and loan disbursements.  He did not say this publically–rather, his statements (reflecting what many officials surely believe) came to light in 2010 in a U.S. government cable released by Wikileaks.

There are a number of reasons for doubts about the accuracy of China’s GDP.  To begin, there are structural political disincentives to reporting accurate GDP figures at the local level.  Local officials are promoted almost entirely on the basis of their locality’s growth rates, giving them a huge incentive to report increasing GDP figures, no matter if they are or not. Environmental concerns have also created an incentive for officials to lie: higher growth rates, when paired with the amount of coal burned, give the province an appearance of greater energy efficiency.

At the central level, it is politically imperative that GDP continues to rise, primarily because the central government has erected a system on the promise of economic success, and fears instability should growth decline and unemployment rise.  At this point in time, with a leadership transition in process, it is particularly crucial that growth continue. 

There are also questions about the mechanics of compiling and calculating the GDP figures, including how much inflation is accounted for.  The Wall Street Journal recently quoted Standard Chartered economist Stephen Green as saying that he believes that China’s 2012 GDP was closer to 5.5%, as opposed to the official figure of 7.8%.  He uses a different measure of service sector inflation, which is higher than the official deflator (the figure that subtracts inflation from growth to come up with GDP). 

Economists also doubt China’s GDP numbers because they seem to be compiled unnaturally fast: the NBS takes 2 weeks to collect its data, compared to 6 weeks for the much, much smaller Hong Kong, and 8 weeks for the United States.  This year, 2012 GDP figures were published on January 18th. 

Finally, economists are concerned about the sampling methods of the NBS: the South China Morning Post reports that officials still “rely heavily on an old-fashioned input-output model of industrial value-added derived from the era of soviet-style central planning” that is able to measure government investment, but not other sectors, such as household spending.

With these concerns in mind, what steps can we and the central government take to more accurately gauge China’s growth?

Several years ago, analysts looked to electricity production to more accurately gauge growth figures. However, last year the New York Times reported that power company managers have been ordered by government officials to report false numbers, exaggerating power production.  The article was questioned, but reports by South China Morning Post reinforce the notion that we can no longer rely on this secondary information to provide insight into GDP figures, chiefly because of aluminum smelters.  The article, published in July 2012, notes that local governments have built countless aluminum smelters (taking production of aluminum from 3 million tons in 2000 to 19 million in 2011) that require a huge amount of electricity–5 percent of China’s total in 2011. Aluminum is now in surplus, but has fulfilled local governments’ goal of inflating their electricity use figures.

On the part of the central government, the government can begin by changing the perverse incentives at lower levels to promote more accurate numbers from the beginning. As noted above, local officials, eager for promotions that are predominantly based on growth figures, are prone to exaggerate their accounts.  

Businessweek notes that the central government has taken some steps to correct the problem: more data is coming directly to the center, without a layover at local party offices; the NBS is working to standardize data collection across ministries and industrial associations; and the NBS is collaborating with such organization as the UN and the IMF to improve economic monitoring.  The numbers could also benefit from increased transparency about the methodology and process of collection.

This discussion of China’s GDP figures should not be read as entirely a blame game: indeed, there are a number of existing challenges that would make it very difficult for even the most transparent and efficient system to produce accurate numbers.  Most significantly, China’s service sector is growing rapidly, requiring a very different method of measurement than China has used in the past and making growth accounting inherently more difficult.

In light of the challenges of assessing China’s true GDP, there have also been discussions about abandoning the fixation on the GDP figure altogether, and moving toward other, alternate figures, including a happiness index, or green GDP, which accounts for environmental degradation. 

The real answer here is to not rely on the figure of China’s GDP as the end all, be all.  With the structural issues present, primarily a changing economic structure, it is instead imperative that one looks at a range of economic indicators, including, but not limited to, new car sales, home construction, fixed asset investment, and freight volume.  It is also crucial to understand the political underpinnings of the accounting for and reporting of China’s GDP.