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What do disgraced financier Bernie Madoff and the Chinese Communist Party (CCP) have in common?
Madoff’s investment funds and the GDP of China as reported by the Chinese government both posted consistently eye-popping returns, year after year, regardless of whether the global economy was over the moon or in the tank.
In Madoff’s case, the purported 10% annual returns were made possible only because earlier investors were paid off using monies contributed by later investors.
However, this “Ponzi” scheme could only be sustained if Madoff was able to continue bringing in new investors whose funds could be used to satisfy the payment obligations to existing investors.
Unfortunately, for Madoff, the 2008 global financial meltdown caused so many investors to redeem their investments that his investment funds collapsed and he had to exchange his silk suits for a prison jumpsuit.
In the end, Madoff was unable to avoid the fate that typically befalls most Ponzi schemes — the inability to bring in enough new money to keep paying all the existing investors the funds they are owed.
In the case of China, the growth of its economy over the past several decades has been mind-boggling, almost seemingly defying gravity.
China has provided a breathtaking developmental model with its GDP supposedly increasing by an average of nearly 9% per year — from 1994 to 2018, all the while accompanied by the movement of hundreds of millions of citizens from the countryside to the nation’s factories.
As with Mr. Madoff’s reported returns, however, many economists have expressed skepticism about the lofty GDP growth rates claimed by Beijing.
According to the Chinese government, its economy has continued to chug along in the high single-digit rates year after year after year — regardless of whether the rest of the world’s leading economies were prospering or floundering.
But why the concern about whether China’s rate of growth is accurate or overstated at all?
Do we really care whether the Chinese economy is growing (or contracting) 2% or 5% or 10% each year?
Is it not more important to be able to obtain consumer electronics and toys and bicycles and fentanyl at the lowest possible prices?
Certainly consumers want to purchase inexpensive goods that may possibly satisfy consumer safety standards but determining the size of China’s economy and its growth rate (negative or positive) has important political implications throughout the world.
China has made no secret of its ambition to displace the United States as the preeminent superpower in the global system and realizes that it must have the world’s largest economy to assume that mantle.
Hence, the CCP has every incentive to accentuate the positive in its statistical reports to demonstrate to the world that China is catching up to the United States.
Some economists have tried to perform “forensic examinations” of Chinese economic data to see if China’s National Bureau of Statistics is exaggerating the country’s GDP growth rate.
Economists from the University of Hong Kong and the University of Chicago, for example, carried out laborious studies of various sectors of China’s economy over a 10-year period ending in 2018.
They concluded that China had been padding its true growth rate by an average of nearly 2% each year.
This may sound like chump change but there is a compounding effect; if these findings are true then China’s economy is about 20% smaller than had been claimed by Beijing for the decade ending in 2018.
As Reuters reported that China’s GDP was $12.81 trillion in 2018, then a 20% discount would reduce that statistic to $10.24 trillion. This represents an enormous shortfall compared to the GDP of the United States — which was reported by the Bureau of Economic Analysis to be $20.5 trillion in 2018 — about double the size of China’s GDP.
If such a wide gap exists between the world’s two largest economies, then it calls into question China’s ability to catch up to the United States anytime soon and exposes its statistical manipulations as little more than financial sleight-of-hand — an unmistakable sign of economic weakness.
The findings of these economists cannot be easily dismissed as they are based upon data that is not easily falsified such as electricity generation, railway cargo, merchandise exports, and satellite-observed nighttime light intensity.
Not surprisingly, their year-to-year calculations of economic growth yielded results that were almost always lower than those provided by those paragons of truth at the Bureau of Statistics.
Such exaggerations are not unusual in totalitarian societies such as China because the CCP believes that its legitimacy is rooted in its ability to provide for the economic well-being of its citizens.
It becomes more challenging to retain a stranglehold on power and justify tossing noisy protestors into prison if the population starts to believe that the economy is failing.
Hence, there is an added incentive to paint an overly rosy picture of the country’s economic affairs.
No less an authority than the Federal Reserve has also tried to determine whether China is indeed “cooking the books” to pump up its global image.
The Fed has pointed out changes in energy consumption can provide a good measure of the level of economic activity in a country.
As a result, it has questioned the reliability of China’s GDP statistics because the Chinese government has reported continuous economic growth even during times in which energy consumption has declined drastically.
During the period between 1997-2001, for example, China claimed that its GDP grew nearly 25% but the economist Thomas Rawski noted that this growth was accompanied by a 30 percent reduction in energy consumption during that same five-year time period.
This precipitous decline in energy consumption suggests that the economy severely contracted during that time — despite the government’s pollyannish claims to the contrary.
Those who believe in the tooth fairy or the Easter bunny will undoubtedly be disappointed to learn that the CCP may have been twisting the truth just a little bit for the past several decades about the size and growth rate of the Chinese economy.
But this conclusion underscores the need to maintain a healthy skepticism about any statements issued by government officials.
After all, it is very easy to lie with statistics and the media is unfortunately often too willing to accept these pronouncements without critical examination.
Jefferson Hane Weaver is a transactional lawyer residing in Florida. He received his undergraduate degree in Economics and Political Science from the University of North Carolina and his J.D. and Ph.D. in International Relations from Columbia University. Dr. Weaver is the author of numerous books on varied compelling subjects. Read more of his reports — Here.