[Note: This article is posted for reference only.]

April 1 issue -- The People's Republic of China is awash in gaudy numbers. For much of its exceedingly long history (5,000 years), the country has held out the promise of the world's biggest market (now more than 1.2 billion consumers). Beijing posted the highest growth rate of any major economy last year--an estimated 7.3 percent, when much of the world was stumbling closer to zero. China is at once the recipient of the most foreign investment of any country in Asia (nearly $47 billion last year), the sponsor of the world's biggest hydroelectric project (the $27 billion Three Gorges Dam) and the site of the world's highest railway, to Tibet (5,000 meters). The parade of gloating statistics would seem to portray a country that is larger than life--or at least larger and more illustrious than nations that must rely upon less quantifiable measures of worth, like, say, France.

á

YET THOSE FIGURES are themselves hardly scientific. Historians trace China's current economic boom back to Deng Xiaoping's famous "southern journey" to the city of Shenzhen in July 1992. Perched atop a golf cart, the 87-year-old paramount leader exhorted local authorities to redouble their efforts to attract foreign capital and open up the economy. The comments led to nearly a decade of double-digit growth. Or did they? Many of the white-hot numbers emerging from the People's Republic in the 1980s and 1990s are now thought to have been cooked up by eager-to-please cadres. The pressure on Chinese officials intensified after the 1997 Asian financial crisis, when Beijing decided that the country had to grow by at least 7 percent a year in order to create enough jobs to forestall social unrest. Not surprisingly, reported growth rates have not dipped below that level since then. After Deng's trip, the numbers reported by provincial authorities became "an important criterion in evaluating local government officials' performance," says Wang Xiaolu of China's National Economic Research Institute. "This [has] created the incentive for statistical falsification."

á

á á á á Economists and professional China-watchers have long taken Chinese numbers with a grain of salt, and no one seems to have been terribly hurt by the puffed-up stats. But the massive labor protests that roiled the rust-belt cities of Daqing and Liaoyang recently provide stark warning of the dangers of relying on smoke and mirrors. Thousands of the laid-off workers who took to the streets don't even exist in China's jobless statistics: they are considered xiagang, laborers who are offered a tiny monthly stipend from their former companies and who are thus not counted as unemployed. Protests most often stem from the fact that even those meager benefits have vanished into thin air. And if GDP growth really is much slower than officially announced--some economists think China could have grown as little as 3 percent last year--then such demonstrations are sure to intensify.

á á á á Chinese aren't bad at math: they invented the abacus as early as the third century. But in China, numbers can often seem little more than rhetorical flourishes. (Recently Premier Zhu Rongji spoke without irony about whether his government had achieved its promise of "one 'must', three completions and five reforms".) Today an element of fakery has crept into several major statistics put out by Beijing. Even some Chinese economists agree that, in addition to the marquee growth figure, industrial output numbers have been inflated. The official jobless rate is seriously understated, as are the billions in nonperforming loans that are dragging down Chinese banks. Don't even try to pin down China's military budget. Officially it was $17 billion last year, but the actual figure could be up to five times larger.

á á á á The real problem is that numbers in China are often more of a political than a scientific tool. During the disastrous 1958-1960 Great Leap Forward, Mao Zedong's regime trumpeted huge gains in steel production--thanks to backyard steel furnaces that were in fact useless--even as millions of Chinese starved to death. Sensitive death or casualty figures--whether from the 1976 Tangshan earthquake, the 1989 Tiananmen crackdown or the current HIV/AIDS crisis--are inevitably low-ball numbers. The biggest obstacle to objective statistical reporting is the fact that "provinces have a [political] imperative to meet or exceed certain targets," says a Western diplomat in Beijing. "So guess what? They meet or exceed their targets." Earlier this month the Guangzhou Daily reported that a township official in Hunan province had fudged GDP and profit figures--and was promoted to chief of a county statistics bureau.

á á á á Since 1998 nearly all Chinese provincial authorities have over reported growth rates, leading to a situation in which the sum of the parts adds up to more than the whole. (In statistics unveiled before the Chinese Parliament this month, every province but Yunnan reported GDP growth rates that exceeded the national figure of 7.3 percent.) In January, Hong Kong brokerage house CLSA declared that "the data that show China as the fastest-growing economy in the world are not worth the paper they are written on"; the company refuses even to forecast China's 2002 and 2003 GDP growth. Thomas Rawski, a professor at the University of Pittsburgh, has conducted probably the most exhaustive review of Chinese GDP growth figures by comparing them against energy consumption, farm output, industrial production and other factors like floods and drought. He says China's economy may actually have shrunk --minus 2.2 and minus 2.5 percent, respectively--in 1998 and 1999.

á á á á On the other hand, unemployment figures are downplayed in order to mask the suffering caused by economic reforms and restructuring. The official jobless rate of 3.6 percent in 2001 does not include xiagang workers, who are estimated to have numbered 10 million last year. Nor does it include farmers who have left their fields to find work in the cities--a "floating population" of around 150 million migrants who are at least seasonally unemployed. Tsinghua University professor Hu Angang has researched the problem using definitions of joblessness more in line with international standards. He concludes that China's unemployment rate was 7.6 percent in rural areas and more than 8.5 percent in the cities last year--well above the breaking point at which Beijing claims social turmoil is inevitable. "We're facing a flood of laid-off workers," warns Hu.

á á á á An even more urgent time bomb may be hidden in China's debt numbers. Central bank governor Dai Xianglong confessed to Parliament this month that national domestic debt was much higher than the official numbers--16 percent of GDP in 2001--suggest. Dai said the figure was closer to 60 percent if unfunded state pension liabilities, local government debt and major banks' nonperforming loans were thrown in. Dai's unusual candor is the good news. The bad news is that independent economists say Dai's statistics are still based on China's yearbook GDP growth statistics. A more realistic figure is higher still--closer to 100 or even 125 percent, according to economist Rawski. The bad-loan numbers at state banks alone are terrifying. The Bank of China has reported two different figures for its nonperforming loans in 1999--one based on Chinese methodology, the second more closely in line with Western accounting standards. The latter is 2.6 times bigger than the former. (The books of China's "Big Four" banks have been called "meaningless" by Moody's.)

á á á á Skeptics say that such discrepancies prove the glam image of China in the popular imagination is, in fact, a sham. In "The China Dream," author Joe Studwell warns investors about "opening a statistical Pandora's box" when they try to measure China's potential. He argues that Beijing's economic foundations have been "laid on sand and constructed from the kind of hubris that drove the Soviet Union in the 1950s." Gordon Chang goes one step further by predicting "the coming collapse of China" within a decade in a book of the same title; he believes the regime will soon be unable to finance the deficit spending that has propelled China's recent growth. These pessimists pooh-pooh the corporate hype that portrays Beijing as a gateway to a vast ocean of 1.2 billion avid consumers. (Actually, many children haven't been counted by census takers, so the actual population figure is closer to 1.3 billion.)

á

[...]

á á á á á á á

Yet Beijing cannot expect its bogus books to be accepted with a wink forever. From the 1997 Asian Flu to crises in Russia and Argentina to the Enron debacle, most of the world's recent spectacular economic collapses were made worse by inaccurate data. Masking giant China's many problems will only guarantee that its stumbles will be more painful than they need be.

á

With Paul Mooney in Beijing

á á á á

á á á á 2002 Newsweek, Inc.