Tuesday, June 10, 2014

A headline in today's SOUTH CHINA MORNING POST:

China accuses Vietnam of ramming its ships 1,416 times around disputed oil rig

The first temptation is to make a joke of it. 
"Nonsense", I wrote to friends and colleagues: "I know it was only 1,412 times." 
But the headline and the culture of numbers from various levels of the Chinese government are not jokes.

"Size Matters" is a recurrent theme in this blog. This is another in the series.

A group in the Propaganda Ministry was convinced that with the specificity of 1,416 rammings, Chinese citizens would be convince their country had been wronged, and the international community would be faced evidence of the seriousness of the issue.

Chinese in all walks of life are prone to a reverence for numbers. 5000 years of history will do that to you. Chinese journalism, particularly in the Party era can be stultifyingly loaded with statistics. 

Chinese journalists are taught to load up on statistics, including minor decimals. (14.62% of people do not believe in...43.67% of people believe.... 41.71% were undecided is a typical report of a survey; yet with all that second decimal "accuracy” missing are the source of the survey, the sample size, and the error rate.) 
The theory is that all those numbers alone will convince readers that the story they are reading is accurate. How could it be wrong if the numbers are carried to the second decimal?

Journalism outside China has learned that while statistics are important, they can also cause readers to glaze over or simply bypass stories. Financial reporting has a particular cross to bear because the financial and economic stories require so many statistics (and graphs) to make their points.

Statistics in China have come to haunt the Party.

China's growth over the last 35 years has defied all economic theory. No country in modern history has had sustained growth of 7-12% for more than 35 years. It cannot be done, is the conventional economic wisdom. This pattern of growth has created a culture of growth within the Party that has made it a slave to the numbers.
There is general agreement about China's growth, but I learned a lesson from a Director of Citibank in Hong Kong more than a decade ago. "We don't believe Chinese statistics, the Director said, "We pay attention to trends, they are more difficult fudge."
Diplomatic language for the fact that Chinese have been lying to each other about their prized statistics since the Mao era. 

False statistics during Mao's time were the cause of tens of millions of deaths from famine when collective farms falsely reported their harvests to protect their jobs and enhance their chances of promotion. Many of those reporting the false statistics died with their numbers.

In modern China Five Year Plans drive the leadership. Setting goals and priorities has been ingrained in Party discipline since the modern Chinese Communist Power took shape in 1949. But now the Party is stuck with a new challenge every five years to say nothing of having to explain why they may have fallen short on some of their goals. 

The Presidents and the Central Committee that rule China have tied their hands in an era when 5 years is a lifetime, certainly a generation. Economic and social conditions change as frequently as semi-annually and sometimes faster than that. 

In a globalized world in a country whose economic strength is challenged by factors outside of its control around the world, the lack of flexibility inherent in a Five Year Plan (even with generalized and fuzzy goals) is a problem. And the problems get pushed downhill from Beijing to the 34 Province level administrative regions in China. 

Each of those regions has a Party Secretary and a hierarchy of officials. Every Party Secretary has ambition; the leaders of the bigger Provinces contemplate their shot at the top in Beijing. Every person under each of those pyramids looks up at their next promotion.

By what standards do they advance?

Now we're back to "Size Matters". 

The statistics count. The numbers, until recently, have been the only guiding measure to be considered for promotion. Not quite true. There is also guangxi, that all-inclusive word that describes your relationships, family and colleagues and mentors and schoolmates. You need both statistics and guangxi to advance in the Party hierarchy.

While the leadership of the Central Government is concerned with meeting its national targets, those targets can only be achieved if the Provincial level is contributing to the growth or minimizing the negative effect slow growth.

Take 2012.

The slowest GDP growth of any Chinese Province was in Beijing, one of China's Provincial-size Municipalities = 7.7% growth but the 290 US$) growth put Beijing 13th on the Provincial list. 

The top growth rate almost doubled Beijing. Guizhou came in at 14% growth but its 110 billion (US$) growth had it 26th on the Provincial list.

Dean Shira and Associates


Play the "Size Matters" game.

China's richest Province is Guangdong (bordering on Hong Kong, one anchor of the Pearl River Delta, 50 million people between Guangzhou, the old Canton, and Hong Kong - an area known on the Mainland as "factory to the world").

Guangdong would rank behind South Korea as the 16th "richest" country in the world. One of 34 administrative regions alone is the 16th richest country in the world on the heels of South Korea one of Asia's tiger economies.

Contrast Guangdong to Tibet, the 31st and last of China's official Provinces (the rest are administrative zones like Hong Kong and Macau). Tibet comes in between Chad and Zimbabwe at 128th on the list of countries ranked by GDP. 

Whatever your political perspective on Tibet, the Province would likely have been near the bottom of the list of the 200 ranked countries when Tibet was independent and among the poorest countries in the world.

China is ranked as the world's second economy measured by GDP (2012 rankings). But at 8.36 trillion dollars China still has a mountain climb to catch up to No. 1 USA at 15.68 trillion dollars (and only 1/4 of China's population).

(The European Union as a whole tops them all with 16.63 trillion GDP in 2012.)

Have your eyes glazed over yet.

There isn't a single statistic I have quoted that cannot be questioned. Canada and India at 1.82 and 1.84 trillion dollar GDPs could have a Talmudic argument over whether their 11th (India) and 12th (Canada rankings are accurate. 

All of these statistics are estimates. It is hoped they are "best" estimates. 

The big question in China is there any "best" estimates. Remember the caution from the Citibank Director: "we don't believe any Chinese statistics."

Consider the challenge to the Chinese leadership at all levels. 

Corruption in China has been raised to a high art since Mao's day. The current administration of Xi Jinping has gone wider and deeper to fight corruption than any previous administration. There are thousands (likely 10s of thousands) of corruption investigations underway in China all the time. How many? It’s a state secret as are so many other facts about China, including many statistical "facts".

The corruption has been shown to be ubiquitous from the village level to within the Ministerial ranks in Beijing. 

Whether you are a Mayor in one of China's 200+ cities with populations of more than 1 million, a Party Secretary in one of China's Provinces, or a member of the Politburo (where the buck finally stops) you know only one thing for sure: you are being lied to. I assume that all of these men (and they are overwhelmingly male an issue I deal with in an earlier blog) do just what the Citibank Director does: they look at trends. But even then, trends can be shaped to lie.

Some of you may say: So what's new? Every executive faces the same challenge. Am I being told the truth? Are the figures I am given accurate and can I rely on them to set policy? Part of the answer lays in the regulated transparency the world outside China has come to require of financial and statistical reporting.

The globalized economy produces information at a rate that is impossible to absorb. It takes algorithms to analyze statistics, to make comparisons, to check and recheck patterns. The Ministries in China have sophisticated software and analytical tools at their command. Their problem is confidence, or more appropriately lack of confidence in the numbers they deal with.

In short the core number 8%, 20%, 36% may or may not be meaningful. Its downhill from there. 8.2%, 20.6%, 36.5%, to the right of the decimal = doubtful at best. 8.23%, 20.68%, 36.43% that second digit to the right of the decimal is for show.

The Chinese single party system has an advantage in dealing with the problems of "Size Matters” and pervasively unreliable statistics. 

The Party's ability to command the economy.

Key is the fact that China's banking system under a variety of different bank brands is owned and operated by the Central Government. The Central Government not only appoints all banking officers but also controls the regulatory apparatus. Interest rates. Deposit margins. Lending priorities. They are all part of a command economy. The Vatican control of the Roman Catholic Church infrastructure and senior officials is a useful way to think of the Chinese system. The problem is the Roman Catholic Church is Lilliputian compared to China. Size Matters.

(For the best description of how China operates on all levels Richard McGregor's THE PARTY remains the best book on the subject.)

The Central Government can reorder Chinese economic priorities with a keystroke, and they regularly do to adjust to domestic and foreign circumstances. The problem comes when those commands make their way down to Provincial, county, city, village and hamlet level. Much can be lost in translation. 

The Party Secretary of Guangdong Province is powerful. he sends far more money to Beijing in taxes and fees than he gets in return. The Guangdong Party Secretary runs the 16th largest economy in the world. He's up there among the OECD rich countries of North America, Europe and right behind South Korea. If a policy command from Beijing threatens his priorities, he tries to finesse the balance between Party loyalist and his Provincial economy.

Down near the bottom of the list Qinghai with 1/33 of Guangdong's GPD can be counted on to be a loyal soldier and follow commands from Beijing. An astute observer of China would point out that guanxi can change any equation. If Qinghai's Party Secretary has a connection in high places he may have more maneuvering room than one might imagine. But then if the guangxi were there why would the Party Secretary be stuck in China's second poorest Province.

The interstices of the Chinese economy are at least as complex as our intestines, but increased to elephant level. Size Matters. 

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