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September 20, 2017

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Seeking truth of China's economy

Four years ago, China was crowned the world'ssecond largest economy, having overtaken Japan. Three months ago, the World Bank said that in purchasing power parity terms, China would become number one this year, surpassing the United States.

But now, a new study issued by the Conference Board, a non-profit New York-based research organization, suggests that China's GDP figures were deliberately inflated over the last three decades and, in fact, the economy grew at an average of 7.2 percent a year for 30 years rather than at 10 percent.

While those growth figures are still very impressive, if true, they suggest that China's economicgrowth rate was similar to that of other East Asian economies and its GDP today is substantially less than claimed. In fact, the Chinese economy may still be smaller than that of Japan.

The Conference Board report was written by Harry X. Wu, economics professor at Hitotsubashi University in Tokyo and senior adviser to the Conference Board China Center for Economics and Business.

After explaining his methodology, Wu concluded that China, during the 1994 to 2014 period, is approximately comparable to Japan during the 1950 to 1968 period, South Korea during the 1969 to 1989 period and Taiwan during the 1967 to 1987 period. That is, stellar but not spectacular.

Chinese official statistics have been contentious for years. Cumulative provincial output figures are almost always inconsistent with stated national figures, with virtually all provinces reporting higher than average growth rates.

Twenty years ago the World Bank adjusted its estimate of China's per capita GDP by 34 percent. In 1998, the economist Angus Maddison estimated that real Chinese GDP growth averaged 7.5 percent a year rather than the official figure of 9.9 percent.

However, economist Carsten Holz of Hong Kong University of Science and Technology, in a paper published last December, took the position that while not every single data series is of the highest quality, the official data get the picture of China's economy broadly right nonetheless.

Premier Li Keqiang, when he was party chief of Liaoning province in 2007, told the then American ambassador that Chinese GDP statistics are man-made and therefore unreliable. He said better indicators of economic activity were those on electricity and rail cargo.

In the Conference Board paper, Wu says that since China's reform and opening up began in 1978, there is evidence of a strong upward bias in official GDP estimates Removal of the bias yields a significantly lower aggregate growth rate.

Moreover, he reports, the inaccuracies in reported GDP estimates at times of crisis are not mainly caused by methodological deficiencies, but instead by political influences.

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