China’s drive to restart its economy revives fake data concerns

By Bloomberg News on 3/2/2020

BEIJING (Bloomberg) - The pressure to get China back to work after the coronavirus shutdown is resurrecting an old temptation: doctoring data so it shows senior officials what they want to see.

This phenomenon is playing out in Zhejiang province, an industrial hub on the east coast, in the form of electricity usage. At least three cities there have given local factories targets to hit for power consumption because they’re using the data to show a resurgence in production, according to people familiar with the matter. That’s prompted some businesses to run machinery even as their plants remain empty, the people said.

On Saturday, a newspaper in one of Zhejiang’s cities appeared to take aim at the practice. The Taizhou Daily published a front-page commentary criticizing local officials for narrowly focusing on power usage, arguing that hitting the targets won’t ensure economic growth. By Sunday, a link to the article on the paper’s website was no longer working.

China’s official manufacturing purchasing managers’ index plunged to a record low 35.7 in February, underscoring how crucial it is for the economy to get back on track as soon as possible. The Covid-19 outbreak has pummeled both consumption and production, putting millions of companies in peril. But if pressure for results from top leaders creates a distorted view of the economy, the risk of policy missteps by Beijing will rise as well.

“It means that even the more tangential barometers being used by economists and investors alike will be rendered inaccurate, and ultimately unreliable,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. in Singapore. “And so looking for the black cat in the dark room will be an on-going endeavor.”

While it’s unclear how wide the problem of doctored data is in China, there are signs that electricity usage has become a focus for more than Zhejiang. The official Xinhua News Agency last week published a story about production resuming in Guangdong, China’s largest provincial economy, using power consumption as the main evidence to show how quickly things were getting back to normal.

The use of electricity demand as a metric risks falling into the trap described by Goodhart’s Law, which says that economic indicators become unreliable when they become the focus of policy makers’ actions.

Below Capacity. Along the industrialized east coast, demand for coal to make electricity was at the highest since Jan. 24 on Monday, but it’s still well below where it should be at this time of year. Along with anecdotal reports from across the region, the power numbers suggest much of the nation’s industrial capacity remains idle or is running at less than full capacity.

Many migrant workers are either stuck in their hometowns or facing a 14-day mandatory quarantine once they return to the places where they work. About 200 million workers would have returned to where they work by the end of February and another 100 million will return from March onwards, transport ministry official Liu Xiaoming said on Feb. 15.

In Zhejiang, one factory owner said they were told verbally by officials on Feb. 26 that they had to reach 20% of their usual consumption, a level the plant was capable of achieving. But some smaller companies are unable to restart work because workers haven’t returned and have resorted to turning on all their electric equipment, even air conditioners, to meet the quotas, according to two factory bosses.

The Zhejiang government did not immediately respond to a query filed online on Saturday seeking comment on the targets.

Beijing has tried to assure the public that the economic restart is going smoothly, touting official statistics that measure the proportion of firms in each province that have resumed work, but don’t account for the capacity they are operating at. Data released last week by the country’s top economic planner showed industrial hubs like Shandong and Guangdong have more than 70% of companies back at work, while in Zhejiang the rate is over 90%.

Government officials on Friday took foreign journalists on a tour of two factories in Beijing to show that production had resumed. Officials at the Huadian Beijing natural gas power plant said that demand and output were about the same as at the same time after the Lunar New Year break in 2019. However, Beijing is not a large industrial hub and it’s unknown if the situation is the same across the nation.

If economic activity doesn’t return to normal soon across the nation, it may spell the end for many firms. A survey of small- and medium-sized Chinese companies conducted this month showed that a third of respondents only had enough cash to cover fixed expenses for a month, with another third running out within two months.

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