When the Chinese government is the sole source of information, how much of it should be believed?

In terms of economic performance, not that much. The Wall Street Journal’s Tom Orlik, author of a book on the subject, challenges those skeptical of Chinese numbers to make a better case. Challenge accepted.

To be clear, it is not true that Chinese numbers are wrong all the time. Also, China does not always overstate its economic performance. GDP growth was slower in 2011 than Beijing claims, but it was faster in 2010. In fact, the economy is likely larger than the government reports.

The issue is whether to start by largely believing official statistics or start (extremely) skeptical, as Chinese Premier-designate Li Keqiang himself does. This is indeed a book-length topic, but the case for skepticism can be built from a short list of core economic indicators:

  • Unemployment. Joblessness can be the single most important piece of information about an economy. China refuses to release any meaningful figures, substituting instead “urban registered” unemployed, which even the labor ministry admits to be artificial and far too low.
  • Inflation. The GDP deflator is the difference between the arithmetic change in GDP and announced real growth. It is a measure of inflation. But it cannot be easily matched to China’s consumer price index (CPI). One reason may be that the official CPI does not properly count housing. There used to be a separate housing price index, but Beijing stopped publishing it when housing prices soared.
  • Industrial production. China is an industrial powerhouse but previously released industrial production volume numbers that were inconsistent from year to year. The government nicely erased this problem with a production index so that, now, new results can no longer be checked against old. It is still difficult to reconcile the industrial index with the official purchasing manager’s index.
  • Banking. Chinese banks massively increased lending in a downturn in 2009, yet their bad loan figures haven’t budged. The last published independent effort to assess the level of China’s non-performing loans six years ago was met with threats by the government.
  • Coal. Coal drives the Chinese economy, permitting electricity-intensive industries such as steel to grow to enormous sizes. China stopped publishing production figures, possibly to avoid acknowledging that it now uses half the world’s raw coal.
  • Investment and Consumption. Every month, Beijing releases investment and consumption figures that it knows are misleading. They add to more than GDP, which should be impossible. Once a year, China releases consumption and investment figures that match international standards and actually make some sense.
  • GDP. Investment and consumption are the key components of GDP. It takes China many months to release the measurements of investment and consumption that are consistent with GDP. Yet it releases GDP itself two weeks after the year ends. How is this possible? For that matter, how is it possible to finish a full economic survey of 1.35 billion people in two weeks, as China claims to do every quarter? Beijing does revise GDP—but only upward.

Finally, GDP growth is so smooth for a rapidly growing economy that any reasonable person would be puzzled. The reason for false smoothness is the same as for the absence of data on coal, housing prices, bad loans, and unemployment: The government will not publish sensitive information. This is obviously true both in and out of economics. Within economics, the question is what is and isn’t manipulated for political benefit. With that question in mind, we should all be skeptics.