At the recent G20 gathering in Shanghai, three Chinese leaders—Premier Li Keqiang, People’s Bank of China Governor Zhou Xiaochuan, and Finance Minister Lou Jiwei—reassured attendees that the Chinese government had the monetary and fiscal tools as well as the know-how to guide the economy through its current challenges. The success of the communications offensive, which seems to have calmed investor concerns for the moment, stands in strong contrast to the communications missteps that exacerbated adverse market reactions to the Chinese government’s stock market and currency interventions over the past year.
These statements at the G20 suggest that Chinese officials are better understanding the need to clearly explain major policy initiatives—a difficult transition for a government accustomed to secrecy. However, communication of this sort represents only one form of transparency. In this post we discuss two other important forms that complement clear explanations by policymakers: data transparency (producing believable numbers), and transparency about the rules of the game (being clear about rules and policies that affect participants in commerce, the markets, etc.). For China to fulfill its potential as a global financial and economic leader, it needs to make further progress on these dimensions as well.
On August 11, 2015, China simultaneously announced changes to its exchange-rate regime and devalued its currency by 1.9 percent against the dollar, a surprise move which sparked market selloffs. Traders apparently inferred that the Chinese leadership knew more than they did about Chinese growth prospects and had devalued to offset weakening domestic demand with increased exports. On the surface, there was no need to guess about Chinese growth: Only a few weeks before, China had announced its second quarter figure was right on target at 7.0%. But to many, this announcement had seemed too good to be true, provoking a flurry of skepticism in the international press.
Are China’s growth numbers wrong? There is a lively debate in the academic literature about the quality of key Chinese data. A case can be made that China’s National Bureau of Statistics (NBS) deserves more credit than it is commonly given. For example, while there is evidence that some official statistics are “too smooth,” this smoothness is unusual in that it includes a long period of overstated inflation and understated growth, which smacks of technical error more than political tampering. One study found that the official growth numbers were “significantly and positively correlated” with externally verifiable measures of economic activity, including import and export data from China’s trading partners, and another found they were historically only “weakly related,” but that the official numbers have been growing more accurate over time. Many researchers (including those at international agencies like the World Bank) find the official GDP data to be at least “usable and informative” [Feng, Hu, and Moffitt].
The NBS has shown signs that it takes seriously its task of providing reliable GDP numbers. As Carsten Holz of the Hong Kong University of Science and Technology observes, the Bureau has increasingly made a point of bypassing suspect provincial reports by conducting its own surveys and relying on direct relationships with firms and other reporting units. So why is there so much skepticism? Because the main barrier to greater data credibility is structural—specifically, the lack of independence and transparency of the NBS and other Chinese data providers.
In the United States and other advanced economies, government statistical agencies are staffed by career professionals whose independence from politics is widely accepted. (The heads of some agencies are political appointees, but the individuals chosen are almost always themselves professional statisticians rather than politicians.) Moreover, the purveyors of official data provide extensive detail about the sources of data and the assumptions and analyses used. Indeed, the process of constructing U.S. GDP statistics, for example, is sufficiently transparent that even private forecasters can “nowcast” current-quarter data by replicating the process used by the U.S. Bureau of Economic Analysis. (For one such model developed by an economist at the Atlanta Fed, see here.) The combination of agencies’ independence from politics and their transparency about methodologies and sources, more so than their resources or technical expertise, makes the official data in advanced economies highly credible.
Chinese data agencies don’t have these advantages. For example, the NBS is a government department under the direct control of the Party and the State Council. The past several directors of the NBS have had doctorates in finance or economics, but their impartiality as statisticians is questioned because of what Holz calls a “near-perfect congruence between the Party leadership and the bureaucratic leadership within the NBS.” (The NBS director is also its top party official.) The principle that data collection agencies should be independent has not gained much traction in China. Moreover, the NBS has little external authority and thus limited ability to set statistical standards for or requisition data from other agencies; consequently, it cannot assure the integrity of the data on which it relies.
China’s statistical agencies also fall short on transparency. Notably, the NBS provides relatively little information about its source data or its statistical framework, making outside verification of its numbers, or an understanding of their strengths and weaknesses, essentially impossible. In particular, the NBS does not publish enough source data to allow researchers to replicate its GDP calculations.
The good news here is that China has a straightforward path to considerably increased data credibility, should it choose to take it: First, the NBS and other statistical agencies could be made substantially more independent, in both reality and perception, by appointing competent, unbiased technocrats; by developing a culture of independence at the agencies, supported by a clear mandate to provide the most accurate data possible; and by making the NBS the official setter of standards for economic data, with the ability to audit data sources and to request information from other agencies. Second, greater transparency about source data and methods, including the possibility of outside peer review, would help reassure users of the quality and objectivity of the data, while clarifying the areas where further improvement is needed. In short, to increase the credibility of Chinese economic data, increase the credibility of the data collectors.
“Rules of the Game” clarity
China’s main stock index more than doubled from November 2014 to June 2015, which led a nervous China Securities Regulatory Commission (CSRC) to limit one type of margin borrowing. This precipitated a 2% one-day fall in the index, which led to further declines as traders were forced to sell stocks they’d bought on margin. The CSRC then responded with “a succession of desperate measures: it suspended initial public offerings, allowed companies to stop trading, and limited short selling,” notes leading Chinese economist Yu Yongding. “It even organized a ‘national team’ of 21 large securities companies, led by a government-controlled financial corporation, to purchase shares.” Yongding notes: “In doing so, China’s regulatory authority changed many well-established rules of the game virtually overnight.
Market participants saw many of the actions taken as clumsy; even worse, the interventions and others that followed seemed arbitrary and unpredictable. Certainly, many Westerners concluded that they would not participate in the Chinese market, at least not until the rules of the game were clearly laid out. In general, the absence of clear and transparent rules and policies—in financial markets, as well as for activities such as commerce, capital investment, and trade—is a major problem because it dissuades participation, adds uncertainty, and can even foster corruption.
On the real-economy side, China has committed to some transparent rule-making. The U.S.-China Business Council (USCBC), in its 2015 Regulatory Transparency Scorecard, noted that “all of China’s economic and trade-related central government agencies have agreed to public comment periods of at least 30 days on draft laws, administrative regulations, departmental rules, and regulations that function as regulations and rules.” These commitments were made in stages—some back when China joined the World Trade Organization (WTO) in 2001, some in bilateral dialogues with the U.S. These commitments apply, for example, to rulings by the National People’s Congress (NPC) and the State Council, in addition to other important bodies. The USCBC’s assessment is that China has made some progress in fulfilling these commitments but has some distance to go. For example, according to the Council, in 2014 the People’s Congress made available for public comment three of the nine laws it passed. The State Council posted 75 percent of the required regulatory documents on its website, using a narrow definition of what is covered by the agreement, or 30 percent with a broader definition of what is covered. However, many of the documents posted were made available too late for comment by affected parties.
Another example of commitments China has made—which it is partially fulfilling—comes from a report released by the office of the U.S. Trade Representative (USTR) a few months ago. When China joined the WTO, it agreed to publish all trade-related laws and regulations in a single official journal. According to the USTR, “some but not all central-government entities publish trade-related measures in this journal,” and “these government entities tend to take a narrow view” of what must be included. Similarly, the USTR claimed that China’s rulemaking process remained inconsistent and that those affected did not always have a chance to comment on proposed rules.
Clarity about the rules of the game doesn’t necessarily mean that the rules are either simple or fair. Indeed, US regulations are riddled with complexities. However, U.S. rules are publicly available and are developed through open processes. Though not sufficient, this seems necessary for well-functioning markets and institutions. It would be in China’s interest to prioritize rules-of-the-game transparency.
There is great value in good communication about policy. Indeed, in the words of a recent Wall Street Journal article, investors are putting “more clarity from China’s central bank over its currency policy and better communication from its stock-market regulator” at the “top of their wish list.”
But transparency is more than press conferences. Data transparency provides investors, the public, and even Chinese policymakers greater confidence about the state of the economy, and transparency about the rules of the game is critical for the economy and for financial markets. The more transparency and consistency the Chinese government can provide in these spheres, the better will be China’s economic performance and the greater its ability to integrate with the global marketplace.