Last fall, at the epochal 19th Party Congress, Chinese President Xi Jinping called out China’s obsession with the pace of economic growth. It seems that some in the country have taken notice. On Sunday, 28 of China’s 31 province-level administrative divisions (including autonomous regions and large cities that answer solely to Beijing) released economic figures for the first half of the year. Nearly half of them posted growth rates equal to or lower than the national average, released two weeks ago, of 6.8 percent. That this can be read as progress in a country obsessed with sustaining robust growth amid an array of mounting economic pressures may seem counterintuitive. But it speaks to several deep-rooted problems that have long bedeviled central governments in China.
One is the dubious nature of official growth numbers routinely posted in China. In recent years, for example, it’s become common practice for all 31 provinces to post growth figures higher than the national average. According to Reuters calculations, the discrepancy between the provinces’ total gross domestic product and the national figure was 2.76 trillion yuan ($415.1 billion) in 2017, or roughly 3.3 percent of China’s official GDP for the year – and this was considered an improvement. To a degree, technical factors can explain this apparent contradiction. In 1985, for example, provincial and national statistics bureaus were separated, leading to some differences in data collection and calculation methods. Moreover, some cross-province shipments could be included in the figures posted by each province involved, and this sort of double counting presumably wouldn’t show up in national figures. But the size and consistency of the disparity between provincial and national data, along with the wide disparities between China’s richest and poorest provinces, means technical problems can’t be the full explanation.
Indeed, Beijing has effectively confirmed that the discrepancy stems largely from either fraudulent or faulty accounting. Last year, for example, the government announced that the National Bureau of Statistics would take over data collection at the regional level beginning in 2019. Meanwhile, Beijing has been bringing the hammer down on suspected book cookers, dispatching teams of auditors, along with investigators from China’s much-feared anti-graft agency, the Central Commission for Discipline Inspection. In early 2017, the government in Liaoning, located in China’s northeastern rust belt, publicly admitted that it had inflated its annual GDP figures from 2011 to 2014. The former Liaoning party chief went to jail over the issue in 2015. (It’s likely no coincidence that in 2016, the province officially fell into recession.) Officials in Heilongjiang and Jilin provinces have also admitted to falsifying GDP data. It’s not just GDP, either. In Jiangxi and Henan provinces, officials were recently punished for using large mist cannons near monitoring stations to improve air quality readings. Moreover, with other targets such as tax revenue tied to growth data, provincial officials who fake GDP stats often end up having to inflate other figures as well, understating the fiscal risks weighing on their province.
Xi has evidently made the problem a priority, denouncing it in speeches and directing one of his famed “central leading groups” – his government’s foremost policymaking bodies – to tackle the problem with extreme prejudice. Of course, the central government is likely guilty of suspect accounting practices itself. Over the past few decades, at least according to Beijing, the Chinese economy has grown with, well, a statistically improbable lack of variance, rarely changing from one quarter to the next by more than a few decimal points, if at all. This dings Beijing’s credibility abroad, but it is presumably done intentionally to support the government’s narrative at home that everything is under control.
But Beijing has good reason to be alarmed when the provinces follow suit because fabricated provincial data is a real problem for Beijing’s ability to govern the country. China needs a strong central government to keep from splitting at the seams, hence Beijing’s broad embrace of Xi’s revival of a strongman leadership model. But strong central governments in China tend to struggle with blindness to problems bubbling up across their vast realm. Most famously, Mao’s belief in faulty statistics on steel and food production provided by lower-level sycophants helped turn the Great Leap Forward into a disaster, fueling a famine that killed tens of millions. China is a massive, unwieldy country ill-suited for micromanagement.
The risk of getting blindsided is particularly acute for Beijing today. Xi is trying to implement an ambitious slate of reforms to put the Chinese economy on stable footing as it heads into a prolonged period of slowing growth. Every reform has tradeoffs, and unintended consequences are inevitable. A crackdown on shadow lending, for example, risks drying up liquidity. Efforts to reduce pollution, industrial overcapacity and real estate pressure all risk exacerbating China’s local government debt crisis. It’s a high-wire act – one taking place amid an intensifying trade war – and to keep balance, Beijing needs accurate data to be able to make minor adjustments in real time.
Still, even if Beijing succeeds in bringing its most flagrant data manipulators in line, it would solve only part of the problem. Just as problematic is the government’s fixation on sustaining breakneck growth for the sake of posting sparkling headline figures. Growth targets have been sacrosanct in the Chinese system, until recently at least. And surpassing the annual targets approved by Beijing has been the key to climbing the ladder in the Communist Party, incentivizing local officials to move hell or high water to make their marks. Outright data faking isn’t the only problem this creates. It also compels provinces to take on unsustainable debt loads, lean too much on fixed asset investment (often backed by harebrained financing schemes) and find ways to keep “zombie firms” afloat long past the point of profitability. These issues are, in large part, why Xi is having to push such painful reforms in the first place.
At the 2018 party congress, Xi called for a shift to “quality-oriented” growth instead. At the Central Economic Work Conference that followed the congress, officials pledged to roll out more qualitative metrics for promotion, such as environmental and poverty reduction targets. And during March’s sweeping government reorganization, Beijing launched a new National Audit Office. In January, 17 provinces lowered their growth targets for the year – signaling a growing belief that Xi’s exhortations had given the provinces cover to take a more realistic approach to growth. Yet, China hasn’t abandoned the practice of setting growth targets entirely, for reasons that are not all that clear. And even if it did, the socio-economic risks in China mean its leaders – whether in Beijing or the provinces – cannot yet tolerate slowdowns on the scale that more advanced economies in the West and Japan regularly manage. So the relentless quest for growth must proceed, along with the high-wire act to contain its risks. Beijing would just rather not do it blindfolded.