Unpacking the Black Box

Senior Fellow

Deng Xiaoping’s oft-repeated aphorism for the Chinese Communist Party is to “seek truth from facts.” As the recently released second-quarter GDP growth figure of 10.3 percent reminds us, this is difficult to do when it comes to the Middle Kingdom. Amazingly, the figure represents a “policy-engineered” slowdown; seasoned China analysts are already second-guessing it. But the fraught process of how these figures are arrived at should tell us as much about how China is really faring as the accurate growth number itself.

First things first: why is there so much skepticism? Every quarter, the National Bureau of Statistics goes through the same ritual. Statistics come in from all over the country. The provinces compile them with impossible speed—around two weeks, or three times as fast as many developed economies with much more efficient processes of data collection.

The NBS sorts through them, “consults” with senior CCP officials, applies a mysterious methodology to trim them into shape, and then spits out a figure that is uncannily well aligned with the targets set by political masters in Beijing. After several years, provincial historical data is tediously retrieved and analyzed by Chinese economists, and official figures are revised. Significant discrepancies are discovered and condemned, ending with Beijing promising to meticulously address the “structural flaws” in the statistical gathering process.

While historical data shows that official figures can sometimes be close to the mark, the quarterly statistical ritual offers insight into how modern China is actually run and into a fundamental weakness of Chinese “market socialism.” During the Tang Dynasty (A.D. 618–907), there was one official for every 2,927 people. During the more recent Qin Dynasty (1644–1911), there was one official for every 299 people. But in modern China, there are up to 50 million officials, amounting to about one official for every 27 people. Its bureaucracy certainly cannot complain about being understaffed.

Yet, while modern China is the most overgoverned land in Asia, it is also one of the worst governed. Even as China has decentralized and officials have multiplied, the country is not building the institutions needed for better transparency and accountability. CCP’s influence over courts, bureaucracies, media, research institutions, and state-controlled enterprises are well known. It’s difficult to make CCP’s local officials accountable when Beijing relies on them to maintain the party’s hold on power in far-flung places.

There is also another problem. The state remains a significant player in the Chinese economy. State businesses receive more than three quarters of the country’s capital. The state owns more than 65 percent of the country’s fixed assets. This means local officials--who make more than three quarters of all state investment decisions--have an overwhelming influence on running these state businesses. They control the dispensation of capital, land, and sometimes even labor. Climbing the greasy ladder of status, power, and wealth within China’s vast political and bureaucratic network depends on results. And results are usually defined by whether the dominant state-controlled sectors in one’s township, city, or county are meeting centrally mandated targets.

This brings us back to the official numbers, which are derived from reporting by local officials. These officials have massive incentives to tell Beijing what it wants to hear as regards hitting central targets—whether it be breakneck growth or an engineered slowdown. It is the basis for their promotion. While the upside for dishonesty is obvious, there is usually little downside, as it’s unlikely they will be caught, let alone punished, for fudging figures.

Dodgy statistics is not in itself the most serious problem. In China’s state-dominated approach, the incapacity to effectively govern such a vast country is the real and pressing issue. The common Western view of “market socialism” as a ruthlessly efficient system, when it comes to top-down policy implementation, ignores the reality that proper verification of any official number is almost impossible. Seeking truth from facts is a wise and pragmatic piece of advice for reforming China. But getting the facts first could be the hard part.