The Truth About China's GDP Numbers

Some people will grab at any opportunity to bury their heads in the sand. It's hard for some to accept the fact that China is rising and U.S. influence is on the decline. A century ago it was just as inconceivable to many Britons that the sun was setting on the British Empire. The American century had begun. That's why scores of Internet pundits pounced on the latest WikiLeaks allegation that China's GDP figures were "man-made." "Fraud," they declared. Smugly they wrote that they knew it all along.

To many it must have seemed an open and shut case. The source of the quote was none other than vice premier Li Keqiang, the very man slated to become China's next premier, after Wen Jiabao steps down. Mr. Li's famous comments were made at a dinner in Beijing with then-U.S. Ambassador Clark Randt on March 12, 2007. Li'ss remarks focused on the challenges he faced when administering the province of Liaoning. Because of its legacy of failed state-owned enterprises, Liaoning was burdened with a huge number of unemployed workers.

As the Communist Party secretary for the northeastern province he often received inflated growth reports from party members who were eager to fill a quota or please their superiors. Li, to his credit, ignored the inflated numbers and relied on hard-to-fake indicators.

According to the leaked cable, Li used three metrics for a realistic view of growth:

1. Electricity consumption (which was up 10 percent in Liaoning in 2006)
2. Volume of rail cargo, which is accurate because fees are charged per unit of weight
3. Loans disbursed, which is accurate because interest fees are precise

Horrified U.S. commentators took one look and cried foul. One shocked China pundit called China's double-digit growth statistics a "sinister fairy-tale." Another concluded that China's growth figures were "fabricated" and wondered "if the growth story in China isn't dramatically overstated."

Scary stuff. But only if you ignore the details.

The Truth About the Chinese WikiLeak

The same pundits who claimed to be shocked by the leaked cable conducted their own cover-up. Li's comments referred only to provincial GDP figures. Any experienced China-hand knows very well that provincial statistics are always inflated.

Every year, China's provinces publish their local growth figures, and the end result is a mathematical impossibility. Last year all but two provinces exceeded the national growth rate. Everyone understands that such numbers are absurd. It's a little like the fictional students of Lake Wobegon, MN who are all supposedly "above average". The joke is on the reader.

Those who rushed to accuse China of fraud ignored that simple fact that provincial GDP figure are discarded when China's national GDP performance is measured. Why cloud a good argument with facts, after all? "Mmm – Kool Aid", one pundit jibed sarcastically, referring to the tainted punch that killed hundreds in Jonestown, Guyana years ago. But such crude sarcasm masks the fact that Li's comments were made during a discussion about the need for accurate figures about the state of the national economy.

Chinese leaders often refer to the nation's economic state as "complex" and "difficult". Indeed, those who understand China's many challenges know that its leaders face widely conflicting demands. Accurate data is vital to decision-making. There is nothing to be gained by issuing exaggerated claims about GDP growth.

So Why Do the Chinese Get ItWrong?

Actually Beijing does make mistakes with its GDP figures every year. It underestimates the number almost every time.

China's vast, entrepreneurial service economy is hard to track. So two years after official GDP figures have been issued, service economy figures are often added on. The corrected GDP figure is usually in the vicinity of $200 billion higher than previously thought. That's more than the GDP of many countries. Such late releases rarely get much attention. They come too late to have any effect on China's economic health or prestige. Often in the past Beijing has low-balled its growth projections, perhaps for the simple reason that it is safest to under-promise and over-deliver. An upside surprise makes everyone much happier than the reverse.

Looking forward to 2011, Beijing estimates that its economy will grow by 10 percent. A "fairy tale?" Well, the World Bank also estimates that China's GDP will indeed expand by 10 percent in 2011.

So, what about some hard numerical indicators like those that Li relied on for better provincial statistics?

• China's passenger-car deliveries to dealers rose to a record in November. Sales of passenger cars including multipurpose and sport- utility vehicles increased 29.3 percent to 1.34 million in the month
• China has long since surpassed the U.S in vehicle production with as many as 18 million units expected this year
• China represents more than 100 percent of incremental demand for all six of the most important metals: steel, iron ore, aluminum, copper, zinc and nickel
• China also uses 10 percent of the world's oil and generates 18 percent of the electricity, analysts at HSBC report
• HSBC says China's cement production will grow by 10.4 percent in 2011
• A 2010 report by the Brookings Institution says consumer driven domestic consumption will account for up to 50 percent of GDP by 2015, up from 33 percent last year, guaranteeing high growth going forward.

I could go on, but you get the point. China's explosive growth is real. And, it is affecting every economy in the world. Only a human version of an ostrich would hide its head in the sand and pretend that China is not real, that it is somehow perpetrating a fraud on the world's economists.

There may be wishful thinking among those who do not wish to see the end of America's days leading the global economy. But even proud Tokyo has admitted that China's growth is real. China has risen to number two, leaving Japan in third spot.

America still has China in its rearview mirror. But it would be a mistake to misjudge that speed at which China is gaining on the U.S. Especially out of pride, sarcasm or plain ignorance.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.