http://www.nakedcapitalism.com/2009/09/how-china-cooks-its-books.html Tuesday, September 8, 2009 âHow China Cooks Its Booksâ Weâve commented from time to time on dubious Chinese data releases. But this report from Foreign Policy reports on an interest aspect: that the statistics are not manipulated only in the normal bureaucratic manner (fudging them) but also by getting companies to change behavior so it can be tallied in a more flattering fashion. The story contains some real bombshells: unemployment is likely 40 to 50 million, as opposed to the widely reported 20 to 30 million; the statistical manipulations are a surprisingly broad-based initiative. From Foreign Policy (hat tip reader Michael): In February, local Chinese Labor Ministry officials came to âhelpâ with massive layoffs at an electronics factory in Guangdong province, China. The owner of the factory felt nervous having government officials there, but kept his mouth shut. Who was he to complain that the officials were breaking the law by interfering with the firings, he added. They were the law! And they ordered him to offer his workers what seemed like a pretty good deal: Accept the layoff and receive the legal severance package, or âresignâ and get an even larger upfront paymentâ¦. Such open-secret programs, writ large, help China manipulate its unemployment rate, because workers who âresignâ donât count toward that number. The government estimates that roughly 20 million migrant factory workers have lost their jobs since the downturn started. But, with âresignationsâ included, the number is likely closer to 40 million or 50 million, according to estimates made by Yiping Huang, chief Asia economist for Citigroup. That is the same size as Germanyâs entire work force. China similarly distorts everything from its GDP to retail sales figures to production activity. This sort of number-padding isnât just unethical, itâs also dangerous: The push to develop rosy economic data could actually lead Chinaâs economy over the cliffâ¦. Pressure to distort or fudge statistics likely comes from up high â and itâs intenseâ¦ But local and provincial governmental officials are the ones who actually fiddle with the numbersâ¦ âThe higher [their] GDP [figures], the higher the chance will be for local officials to get promoted,â explained [Gary] Liu. The story then goes through a good list of distorted and certain to be exaggerated figures, then returns to an assessment: Still, it is possible to infer the severity of the gap between economic reality and China-on-paper by looking closely at monetary policy. Chinaâs state-owned banks dramatically increased lending in the first half of 2009 â by 34.5 percent year on year, to more than $1 trillion. This move seems intended to keep growth artificially high until exports bounce back. Most analysts agree that it is leading to large bubbles in the stock, real estate, and commodity markets. And the Chinese government recently announced plans to raise capital requirements â an apparent sign it sees the need to reign in the expansion. For the long term, China is banking on its main export markets â in the United States, Europe, and Japan â recovering and starting to consume again. The hope is that in the meantime, rosy economic figures will placate the masses and stop unrest. But, if the rest of the world does not rebound, China risks the bursting of asset bubbles in property and stocks, declining domestic consumption, and rising unemployment. Thatâs when the Wile E. Coyote moment could happen. Once Chinese citizens no longer believe that the economy is doing well, social unrest and more widespread worker riots â already increasing in scope and severity â are likely. Thatâs something that China will have a harder time hiding. And then weâll know whether Chinaâs statistical manipulation was a smart move or a disastrous mistake. Although it should have been blindingly obvious, it never occurred to me that the cheerleading via distorted numbers was to promote social cohesion.