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The truth about China's economy
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The truth about China's economy
Published  12/27/2007

Article Link
TORONTO, Dec. 27
HARI SUD

Column: Abroad View

China has been the darling of the West, showered with praise for the massive economic strides it has made. Until recently, the West has turned a blind eye to the falsified statistics China has routinely produced to impress the world.

These numbers, along with the impressive infrastructure China has built in and around the major cities of its eastern seaboard, have given China a huge image boost. Visitors from the United States, Europe and Canada have had nothing but praise for China's accomplishments. The Chinese themselves have been basking in the glory.

Yet in truth, it is all a house of cards.

Only recently have independent reports begun to appear in the mainstream Western press that China is not developing as fast as previously portrayed. Not only that, there are wide gaps between published economic figures and the truth. It is beginning to emerge that China has been hoodwinking the West.

A stark new analysis by Albert Keidel, an economist at the Carnegie Endowment for International Peace, has laid China's overconfidence bare. His report says: "China's official statistics have been based for years on assumptions -- wrong assumptions -- made more than 20 years ago. For example, the World Bank estimated in 1980 that 300 million Chinese lived in dollar-a-day poverty. The real number was, in fact, closer to 500 million."

In the face of such new revelations, the World Bank is revising its numbers on China. It now states that: "official survey results indicate that the number of Chinese who live on less than $1 (U.S.) a day today probably exceeds 300 million -- three times as many as current calculations indicated. One Chinese in four, in other words, in 2006 still lived in abject poverty."

The above report does not dispute China's rapid strides, but restates that the task of alleviating poverty is more gargantuan than previously thought.

Here are a few interesting snippets on China's per capita gross domestic product by four different authorities. A few of these authorities take China's statistics for granted. Others have done independent analysis.

The International Monetary Fund and the U.S. Central Intelligence Agency have used Chinese statistics to arrive at a per capita GDP of about US$7,800, on the basis of purchasing power parity. The University of Pennsylvania in an authoritative independent analysis has calculated Chinese per capita GDP at US$5,772. The Carnegie report uses its own truth factor to arrive at US$4,380 as the figure. The last figure discounts China's enthusiasm for overstating its achievements.

By comparison, India's per capita GDP is US$4,000, on the basis of purchasing power parity.

Financially China is internally worse off, excepting its stellar performance in accumulating more than US$1 trillion in foreign reserves. Martin Hutchinson wrote in the Asia Times on Dec. 5: "The lackluster investment strategy of China Investment exposes a central flaw in the Chinese economy, its lack of a rational system of capital allocation. For more than a decade, Chinese state-owned companies have made losses and have been propped up by the banking system. Since 2004, loss-making state-owned companies have been joined by overbuilding municipalities, erecting white-elephant office blocks in attempts to turn themselves into the next Shanghai. None of these losses have resulted in bankruptcy; instead the cash flow deficits have been covered by the Chinese banks. As a result, these banks have an enormous volume of bad loans -- $911 billion at May 2006, according to a later-withdrawn estimate by Ernst & Young, which must surely have ballooned to $1.2 trillion to $1.3 trillion now."

This explains China's limited international investment strategy. Almost all of its cash reserves abroad are needed to prop up its internal banking system.

Turning to more long-term issues of balancing growth and the environment, the International Herald Tribune published four reports about growth, general pollution, polluted drinking water and land degradation between Aug. 25 and Nov. 23. Each of these reports tackled the issue of choking economic growth and its impact on the everyday lives of the people. To quote one: "Chinese cities often seem wrapped in a toxic gray shroud. Only 1 percent of the country's 560 million city dwellers breathe air considered safe by the European Union. Beijing is frantically searching for a magic formula, a meteorological deus ex machina, to clear its skies for the 2008 Olympics."

Again the International Herald Tribune reports that: "Pollution has reached epidemic proportions in China, in part because the ruling Communist Party still treats environmental advocates as bigger threats than the degradation of air, water and soil that prompts them to speak out."

Writing about the huge Three Gorges Dam, the IHT says: "The Communist Party is hoping the dam does not become China's biggest folly. In recent weeks, Chinese officials have admitted that the dam was spawning environmental problems like water pollution and landslides that could become severe. Equally startling, officials want to begin a new relocation program that would be bigger than the first."

Hence we are back to the question, what is the truth about China?

China's export figures are a truth, because multiple economic think tanks outside of China keep records of them. Chinese foreign reserves are a truth, because most of the data comes from the foreign banks and other financial instruments that hold the money. Their imports are a truth, records of which are maintained by foreign governments.

Foreign direct investment data, however, is a bit suspect. Although the Chinese report the data truthfully, the inclusion of returning profits via Hong Kong inflates the numbers.

Suspect are the yearly growth statistics and the GDP, which in turn relate to all production and consumption statistics. The Communist cadres who prepare these statistics round the production and consumption data to their advantage, which makes them look good in front of their peers in other regions and their Central Communist Party bosses.

All the above has made the Chinese look good since 1980. As the truth begins to emerge now, the West does not wish to look foolish for reporting bad data. Hence they have very slowly begun to ask the key question: How reliable are China's economic statistics? Very soon this question will overwhelm the Chinese government, which will find it hard to explain the fallacies.

It is bad for China to report flawed economic data. Finding out about this is likely to change people's enthusiasm for all things Chinese. Beijing's US$2 billion publicity and showcase event, the 2008 Olympics, may encounter too many skeptics.

Too much bad publicity about China's overall progress, as well as the bad air that athletes and onlookers alike will breathe in Beijing, may ruin the party. Once China's reputation is ruined, there will be nothing it can do to get it back.

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(Hari Sud is a retired vice president of C-I-L Inc., a former investment strategies analyst and international relations manager. A graduate of Punjab University and the University of Missouri, he has lived in Canada for the past 34 years. ©Copyright Hari Sud.)