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Economy

Provinces across China are admitting to padding figures

Coming clean often leads to more central government subsidies

A worker operates at a construction site on a building in Shenyang, Liaoning province. The northeastern province admitted it had inflated its fiscal revenue.   © Reuters

BEIJING More local governments in China are admitting that they have faked economic data, and are moving to correct their doctored numbers. This growing trend comes in response to a major shift in Beijing's economic policy toward the quality of growth.

The governments of provinces and municipalities have an incentive to offer more accurate economic and fiscal statistics now that President Xi Jinping is prioritizing quality over quantity in economic policy.

Although growth rates have long been a key driver in evaluating the job performances of bureaucrats, this shift to quality is promoting honesty in data reporting from local governments.

But there appears to be a further motive for the recent flurry from local governments to admit past data falsifications -- more subsidies from the central government to plug yawning budget holes.

Of the 31 provinces, centrally administered municipalities and autonomous regions in China, three were quick to admit to falsifying economic data. The northeastern province of Liaoning did so in January 2017, then in January 2018, Inner Mongolia Autonomous Region and the city of Tianjin said their statistics were wrong.

Of these three, only Tianjin has admitted to doctoring its overall provincial gross domestic product figures. Liaoning and Inner Mongolia said they padded their fiscal revenues.

Apartment blocks are pictured in Wuqing District of Tianjin, China on Oct. 10, 2016.   © Reuters

In Liaoning Province, tax receipts and income from various fees were padded by 20-30% by some counties and cities during the period of 2011 to 2014. Inner Mongolia has said that a quarter of the fiscal revenue stated for 2016 was fake.

Fiscal revenue does not include proceedings from land sales, and therefore makes it a key indicator of the local government's true fiscal health.

"Chinese bureaucrats were promoted based on two figures -- GDP and tax revenue," said Nie Huihua, a professor at Renmin University of China. Unscrupulous bureaucrats routinely inflated fiscal revenue to move up the career ladder.

More cases of fiscal padding have come to light. In December 2017, the National Audit Office announced that 10 cities and districts in Hunan, Yunnan and Jilin provinces and the centrally administered city of Chongqing had overstated their fiscal revenues by a total of 1.5 billion yuan ($236 million).

But why now?

One reason is the change in metrics used to evaluate bureaucrats. No longer is it about bigger growth statistics. New policies also emphasize environmental responsibility and poverty reduction.

There is also an important change due in 2019: The National Bureau of Statistics in Beijing will begin calculating regional GDP instead of it being done by local governments.

With this handover looming, regional governments are becoming more inclined to admit to faking economic data before being noticed and penalized by Beijing.

A closer look into the Liaoning case reveals shrewd mercenary motives.

The province's fiscal revenue fell to 220 billion yuan in 2016 from its peak of 330 billion yuan in 2013, according to corrected data. But despite a revenue drop of 110 billion yuan, spending decreased by a much smaller amount, 60 billion yuan, during the same period.

The gap was filled by subsidies from the central government. The amount of financial support the province received from Beijing increased by over 30 billion yuan during the period to 190 billion yuan in 2016.

Consequently, the ratio of state subsidies to the Liaoning government's expenditures rose to 43% in 2016 from 31% in 2013.

The Chinese central government provides fiscal subsidies to narrow disparities between regions. Financially strained provinces and municipalities with fewer revenue sources are given more money from the state than richer ones. Beijing's financial aid to Liaoning surged on the province's lower revenue figures.

EMPTY COFFERS Overall, local government revenue growth slowed sharply to 5% in 2017 from 29% in 2011. Meanwhile, local government spending has continued to grow due to swelling social security spending.

The growth rates of regional government outlays have surpassed those of revenue growth for the three years through 2017. Most local governments are struggling with serious fiscal strains.

In its efforts to make up for revenue shortfalls, Liaoning went so far as to collect taxes for the following year and delay refunds owed to taxpayers eligible for special tax breaks.

Farmers pile up chili peppers onto a tractor on a farm in Shenyang, Liaoning province, China on Oct. 17, 2017.   © Reuters

Local governments have piled on debt to fill budget gaps. Total local government debt reached 15 trillion yuan at the end of 2016, according to official statistics. But the International Monetary Fund has estimated the actual amount, including off-the-book debts, at 32 trillion yuan.

Most local governments cannot finance their spending without cash from Beijing. In many provinces, state funding provided to local governments exceed the taxes and fees they pay to the central government.

"The Ministry of Finance has fully understood the financial difficulties faced by our province and strongly supported us," the Shandong provincial government wrote in a report to the central government at the end of 2017.

The tone and language used in this plea for more state subsidies and permission to increase the amount of bonds it can issue has prompted this advice from online commentators: Admit to inflating fiscal revenue and receive more money from the central government.

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