Illusion of growth: Data inflation among China’s local governments
Chinese academic Han Heyuan highlights the distorted information flow within China’s bureaucratic system, where local governments inflate fiscal revenue to meet essential political performance indicators, resulting in distorted financial reporting and compromised public integrity.
Many people have their doubts when it comes to data provided by local governments in China. This scepticism is present not only among the public and some media, but even high-ranking officials, including former Premier Li Keqiang, who previously expressed doubts about the statistics provided by local governments.
Distorted information flow in China
In mid-March 2007, then US ambassador to China Clark T. Randt visited Shenyang and met with Li, then secretary of the Liaoning Provincial Party Committee. The meeting notes were sent back to the US State Department in a confidential cable three days later.
According to information revealed by WikiLeaks, Randt stated in the cable that Li, the “star” official who hosted him, admitted that Liaoning province’s GDP data was unreliable. Li told Randt that he had to find ways to “squeeze out the water” from the statistics (meaning cut through the inflated figures).
Li is not alone in questioning the accuracy of statistics among Chinese officials. Research indicates that scepticism is widespread within the government. Xiao Kezhou, an assistant professor of economics at Sun Yat-sen University and Brantly Womack, a professor at the University of Virginia, highlighted this.
...at least 36% of officials and 72% of staff within the government distrust national-level statistics.
Based on The Guangdong Cadre Opinion Survey conducted in the summer of 2010 with the help of the School of Government at Sun Yat-sen University, only 64% of officials and 28% of staff in the government trusted national statistics. In other words, at least 36% of officials and 72% of staff within the government distrust national-level statistics.
This is indeed intriguing. In their study, Xiao and Womack attributed the issue to distorted information flow within China’s bureaucratic system, i.e. information gathered at the centre is increasingly restricted as it is transmitted down the bureaucracy. Meanwhile, the “facts on the ground” are sifted by local official interests at each level of upward transmittal.
A game that ended in crisis
In the 1960s, Professor John D. Sterman of Massachusetts Institute of Technology’s Sloan School of Management conducted a well-known experiment, the beer distribution game, a strategy game similar to Monopoly.
In the experiment, Sterman divided MBA students of different ages, nationalities and industry backgrounds into four groups, each playing the roles of consumer, retailer, wholesaler and manufacturer. Sterman explicitly required that no business information be exchanged between upstream and downstream companies; only orders could be passed up the chain, i.e. consumers could only place orders with retailers; retailers with wholesalers; and wholesalers with manufacturers.
As a result, the retailers, wholesalers and manufacturers initially experienced severe shortages, but eventually faced severe inventory accumulation.
Even more intriguing is that this game has been played tens of thousands of times in MBA classes at renowned universities worldwide over the past 50 years, involving students of different nationalities, ethnicities, cultures and experiences. While some participants were students without work experience, others were elites from production or distribution systems — regardless of who played, the game consistently ended in crisis.
China’s bureaucratic system is characterised by a typical hierarchical structure, with multiple layers and a clear chain of command. Information transmission resembles the beer game...
Inflating figures to minimise political risk
This phenomenon caught the attention of Professor Jay Forrester, who termed the amplification of demand variation during information transmission as the bullwhip effect. He believed that the bullwhip effect exposes problems with information transmission in the information chain, primarily due to information asymmetry between nodes, and nodes pursuing their self-interest, leading to distorted information transmission.
The length of the information chain becomes a crucial factor influencing the degree of information distortion. In seeking to maximise its interests, each node may selectively process information beneficial to itself and filter out unfavourable information or at least minimise its impact. The longer the information chain, the more layers are involved, increasing opportunities for manual processing and distortion. By the time information reaches the final link, it has significantly deviated from the original.
Currently, China’s bureaucratic system is characterised by a typical hierarchical structure, with multiple layers and a clear chain of command. Information transmission resembles the beer game, with each level passing information to the next. This partially explains why China’s statistics often contain so much “water”, or distortions.
Furthermore, under the current performance evaluation system, in each region and work unit, if officials want to hold on to their jobs and get promoted, they have to show concrete results, such as GDP growth and increased investment attraction.
Many officials fabricate numbers by inflating and exaggerating them to make them look good.
However, the overly simplistic evaluation metrics and the “one-vote veto” system in personnel management, as well as the grassroots level being hampered by limited economic resources, have driven officials to manipulate data in line with superiors’ preferences, or report false or exaggerated figures to minimise political risk.
The unwritten rule of “officials create numbers, numbers create officials” prevails, exacerbating already distorted information as it flows within the bureaucracy. Many officials fabricate numbers by inflating and exaggerating them to make them look good.
Exposed financial falsification
Recently, the audit reports for the previous year released by various regions in China have exposed that multiple local governments fraudulently inflated their fiscal revenues. In some areas, the inflated revenue even exceeded tens of billions of RMB, which undoubtedly confirms this point.
According to statistics, the reports from Guangdong, Hebei, Sichuan, Qinghai, Liaoning and Inner Mongolia Autonomous Region have exposed financial falsification issues by some county and city governments.
The underlying reason for local governments inflating their fiscal revenue is that revenue growth indicators are critical metrics in assessing political performance.
Three cities and three counties in Guangdong province increased their fiscal revenue by 17.1 billion RMB (US$2.4 billion) through means such as purchasing state-owned assets through state-owned enterprises.
One city and seven counties in Hebei province inflated their fiscal revenue by 2.5 billion RMB through methods such as fraudulent disposal of public assets, overreporting state-owned capital operating income, and manipulating income from fines and confiscated goods.
In Sichuan province, some regions deposited donor-advised funds into the local treasury, inflating their fiscal revenue by 41.51 million RMB.
The underlying reason for local governments inflating their fiscal revenue is that revenue growth indicators are critical metrics in assessing political performance. This pressure to meet targets ultimately distorts financial reporting and undermines the integrity of public administration.
This article was first published in Lianhe Zaobao as “数据造假的中国式逻辑”.
