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November 3, 2015

You Can't Believe China's Government Data

  Investor's Business Daily

Can we believe anything the Chinese government says about their country's business climate and economy? Its tanking stock market shook the financial world in August, causing global markets to tumble. And yet officials now claim the economy grew by 6.9% in the third quarter — lower than previous quarters, to be sure, but not by much.

Reuters highlights the shady goings-on: "But perhaps the biggest question is how a developing country of 1.4 billion people can publish its quarterly gross-domestic-product statistics weeks before first drafts from developed economies like the United States, the eurozone or Britain, and then barely revise them later."

Good question. The news agency quotes Erik Britton of the London-based independent research firm Fathom Consulting as saying, "We think the numbers are fantasy. There is no way those numbers are even close to the truth."

And so it's been for decades with China, especially under Chairman Mao. Communist countries manipulate their data to claim they're doing much better than they are. They pretend their economic numbers are real, and developed economies pretend to believe them — sometimes.

U.S. companies operating in China seem to have a gloomier economic outlook than the government.

The U.S.-China Business Council, which co-hosted an event featuring a speech by President Xi Jinping on his recent U.S. visit, released a survey of its member companies, which showed that only 24% of surveyed executives were optimistic about the business outlook in China, while 67% were somewhat optimistic or neutral. That's down from 58% and 33%, respectively, five years ago.

That gloom is backed by data: China's purchasing managers' index has fallen six of the past 12 months, and was under 50 in August, which indicates a contraction.

And there's another reason for the gloom: The government appears to be targeting U.S. firms. Microsoft and Accenture had their offices raided in 2014 by Chinese regulators who claimed to be enforcing anti-monopoly laws.

The government also raided the Chinese subsidiary of Illinois-based OSI Group, Husi Foods. Two recently hired workers filmed themselves mishandling food and then leaked the video. That's one way of stifling competition with Chinese-based companies that may have better political connections.

It appears to be part of a growing trend. Chinese officials have cranked up investigations of multinational corporations for alleged monopoly activities and to fight corruption — which is rich, coming from a government that is widely seen as plagued with corruption.

And one of the government's favorite tools is early-morning raids. The practice has become so prevalent that "companies are giving staff practical coaching, including holding mock raids, and bringing in legal experts to train them on how to handle intense, on-the-spot questioning, negotiate cultural hurdles, and make contingency arrangements to source emergency legal advice," according to Reuters.

The reason for these aggressive tactics: By harassing foreign-owned companies operating in China, the government hopes to give domestic companies a competitive advantage.

As Jeremy Gordon, author of "China: Risky Business," told Forbes: "The (Chinese) economy is moving away from an export model to domestic consumption and foreign companies don't have the same role they used to have. Where previously senior executives got the red carpet treatment, that's no longer the case."

That may be an understatement. The treatment seems to have shifted from the "red carpet" to the red tape — or maybe the Red Scare.

Interestingly, the companies being targeted seem to be focused on areas where China believes it can compete: technology, pharmaceuticals and food (in the case of OSI Group).

When a country's authorities challenge one or two foreign-owned companies, you might initially think the government has reason to believe that the companies are breaking the law. When harassment and raids become commonplace, you realize the real crime is being committed by government officials, not companies.

It's a very unfortunate turn of events. For all its pretense to want to join the developed countries as an economic equal, China has never learned the lesson that competition, transparency and the rule of law lay the foundation for prosperous economies — and good business relations.


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