WASHINGTON: China’s stock market took a breather Friday after plunging this week, pulling global markets down with it. But the financial turbulence rocking China has brought to the surface a deeper fear: That its economy is sinking, and that its downfall will derail the still-fragile economic recovery going on in other parts of the world.

What makes those fears worse is that few people have a good understanding of how well China’s economy is really doing. The country’s official growth figures paint a rosy picture that any country would aspire to: In the third quarter, China said its economy expanded 6.9 per cent from the previous year, far above US growth of 2pc.

But how much should we believe those figures?

“Not a lot,” says Mark Williams, the chief Asia economist at Capital Economics, a research consultancy based in London.

“They are absolute make-believe,” says Leland Miller, the president of China Beige Book International, which compiles private surveys on the Chinese economy.

China’s economy has been gradually slowing from the double-digit rates it recorded in past decades, due to a variety of factors, some of which are the inevitable result of many years of fast growth, and some of which are not. But experts widely disagree on exactly how much the economy has slowed. While some analysts estimate the growth in China’s gross domestic product (GDP) at as little as 1 or 2pc, other estimates are higher, even if not as high as the country’s official read.

Williams’ firm — which set up its own measure for Chinese economic growth in 2009 based on figures like cargo freight volumes — believes China’s economy is likely growing at 4 or 4.5pc. The chart below shows how his firm’s estimates for China’s growth have recently sunk below the official figures:

Miller’s firm estimates that China’s current growth is around 4.5pc, though he calls the focus on GDP “sort of a distraction,” since GDP reflects aggregate growth, rather than the type of real productive economic activity that is sustainable and leads to more growth. “If China wants to generate aggregate growth, all it has to do is build a bridge, tear it down, build a bridge, tear it down, and keep going,” he says.

China denies allegations that it cooks its books. “China does not underestimate its GDP deflator and we don’t overestimate our GDP,” a spokesman from the statistics bureau said in July.

The question of China’s official growth statistics is one of credibility. If the country is overstating growth a bit, then it might mean that the world economy will be a bit weaker in coming years than expected. If it is overstating it a lot, it could mean China’s government is really worried about whether it is coming in for a hard landing, with far more serious implications for both the country and the global economy.

Many analysts say political pressure is certainly behind the inflated numbers. Achieving growth targets is a matter of political importance in China, and there’s evidence that someone somewhere is fiddling with the numbers.

For one thing, China’s No. 2 leader, Li Keqiang, admitted as much in 2007. A diplomatic cable released to the public by Wikileaks quoted Li as saying during a dinner that GDP figures were “man-made” and therefore unreliable. Li said he personally looked at electric consumption, rail cargo and loans disbursed for a clue to how the economy was operating, rather than official growth figures.

“All other figures, especially GDP statistics, are ‘for reference only,’ he said smiling,” the cable reads.

There’s also a lot of numerical evidence that something fishy is going on.

In most years, if you add together the estimates that each of China’s 31 provinces give for their economic activity that year, you’ll get a figure that is much larger than Beijing’s independent calculation of what each sector produced that year. So much larger, in fact, that it looks like China is missing an entire province — suggesting that local leaders are being more than a little optimistic about their growth.

According to calculations by Capital Economics, the wealth of other economic data coming out of China suggests that GDP figures are overstated. And China’s growth figures in times of economic turmoil — like the Asian financial crisis — have been suspiciously steady. Unlike most emerging economies, China’s “real growth rates are uncannily stable from quarter to quarter, which suggests that there is routine smoothing going on,” Williams wrote in a note in October.

The culprits are usually thought to be the official growth targets that leaders set for different provinces and the country as a whole. For decades, China has set an official economic growth target as part of its “Five-Year Plan,” which is exactly what it sounds like — a wide-sweeping development plan for the country for the next five years. In order to be promoted, officials at all levels must do their part to meet the goals in the Five-Year Plan.

China always manages to meet its annual growth targets. And despite growing evidence that the economy slowed in 2015, leaders have said that the country will still meet its goal of growth “around 7pc.”

Westerners sometimes des­cribe China’s record of satisfying these growth targets as a conspiracy — as if someone in a back room at China’s statistics bureau is tasked with changing 0s to 7s until all the numbers add up.

Bloomberg-The Washington Post Service

Published in Dawn, January 10th, 2016