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Is China’s “Black Box” Economy About to Come Apart?
Is China’s “Black Box” Economy About to Come Apart?
After 30 years of torrid expansion, perhaps the single most consequential factor in China’s economy is how much of it is a “black box”: a system with visible inputs and outputs whose internal workings are opaque.
There are number of reasons for this lack of transparency:
- Official statistics reflect what officials want to project, not the unfiltered data.
- Policy decisions are made behind closed doors by a handful of leaders.
- There is little institutional history of transparency.
- Many important statistics are self-reported and prone to distortion.
- Large sectors of the economy are informal and difficult if not impossible to measure accurately.
- Endemic corruption distorts critical economic yardsticks.
- There is little historical precedent to guide policy makers and individual investors.
None of these is unique to China, of course, with the possible exception of #7: few nations in history (if any) have experienced an equivalent boom in infrastructure, credit, housing and wealth in such a short span of time.
Saving Face By Editing Data
As anyone who has lived and worked in Asia can attest, public perception (i.e. “face”) is of paramount concern. There is tremendous pressure to put a positive spin on everything in the public sphere. Negative publicity causes not just the individual to lose face, but his boss, agency, company and family may also be tarnished.
For this reason, reporting potentially negative numbers accurately may put careers and hopes for advancement at risk.
This accretion of fear of reprisal/disapproval builds as it moves up the pyramid of command. This process can lead to tragic absurdities being taken as truth. In one famous example in Mao-era China, officials ordered rice planted in thick abundance along a particular stretch of road, so that when Chairman Mao was driven along this roadway, he would see evidence of a spectacular rice harvest.
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China Fake Invoice Evidence Mounts as HK Figures Diverge – Bloomberg
China Fake Invoice Evidence Mounts as HK Figures Diverge – Bloomberg.
The gap between China’s reported exports to Hong Kong and the territory’s imports from the mainland widened in September to the most this year, suggesting fake export-invoicing is again skewing China’s trade data.
China recorded $1.56 of exports to Hong Kong last month for every $1 in imports Hong Kong registered, leading to a $13.5 billion difference, according to government data compiled by Bloomberg. Hong Kong’s imports from China climbed 5.5 percent from a year earlier to $24.1 billion, figures showed yesterday; China’s exports to Hong Kong surged 34 percent to $37.6 billion, according to mainland data on Oct. 13.
While China’s government has strict rules on importing capital, those seeking to exploit yuan appreciation can evade the limit by disguising money inflows as payment for goods exported to foreign countries or territories, especially Hong Kong. The latest trade mismatch coincided with renewed appreciation of China’s currency, leading analysts at banks and brokerages including Everbright Securities Co. and Australia & New Zealand Banking Group Ltd. to question the export surge.
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