China | Corporate

How a Beige Book Could Shed Light on China’s Shadow Economy

By Dan Kedmey | Time Magazine | August 5, 2013

China’s economy has grown at such an astonishing rate over the past 30 years that even economists have hailed it as a “miracle.” GDP has grown by an annual average of 10% since 1979, effectively doubling in size every eight years. China now has the second biggest economy in the world and may overtake the U.S., the world’s largest, within the next decade. But a lingering doubt hangs over all these heady figures — whether they’re from the past, present or future — because they have originated from a little-known branch of the Chinese government called the National Bureau of Statistics, whose inner workings remain infuriatingly arcane.

Officials have been reluctant to give outsiders a peek, and there are hints at unsavory practices. Current Chinese Premier Li Keqiang admitted in one cable released by WikiLeaks that GDP figures were “man-made.” The National Bureau of Statistics has occasionally reprimanded local officials for embellishing provincial statistics to boost their chances of winning promotion. This may explain how China has achieved the mathematical impossibility of getting every region to grow faster than the nation as a whole. In addition, “too much is changing too fast,” says Carsten Holz, an economist at the Hong Kong University of Science and Technology. He points to a flourishing service sector — barbershops, computer-repair stores, shadow banks — which adds value in ways much harder to measure. The overworked number crunchers in China’s National Bureau of Statistics, accustomed to Soviet measures of tractors and concrete, have struggled to track the changes in this fluid, fast-growing sector, issuing reports that Holz says “are a mix of a lot of good statistics and guesstimates.”

Unfortunately for China’s foreign investors, they can rarely tell the fact-based appraisals and guesstimates apart. This has created an opportunity for a private company headquartered in New York City, called the China Beige Book, to rush into the credibility gap with its own statistics. Each quarter it publishes a roughly 70-page-long namesake report curated from their online and in-person surveys of more than 2,000 businesses and banks spread across the mainland. The China Beige Book is based on its pre-existing U.S. equivalent, quietly compiled by census takers and published with little fanfare by the U.S. Federal Reserve. China Beige Book believes its customers can drill below the Beijing government’s semireliable national figures, past its completely unreliable regional figures, to a bedrock of measures that matter to them. “Official data is not enough,” says CEO Leland Miller. “You need deeper data to get underneath the hood.” The firm sells the report to hedge-fund managers, multinational executives and anyone who has tens of millions of dollars riding on China’s economy.

Miller’s team has one distinct advantage over the vast bureaucracy at China’s statistics bureau: an ability to coax candid answers out of Chinese businesspeople. To oversee this effort, they tapped Craig Charney, a professional “crisis pollster” whose firm has conducted surveys in some of the trickiest polling environments on earth: Yemen, Iran, apartheid South Africa and some 40 other “emerging” to “full-fledged countries in flames.” In all these he has noted that long-silenced populations, once they get comfortable, have a startling desire to speak up. So when he and Miller launched their first surveys of China’s businesspeople, gathering them inside a Shanghai conference room and watching them behind a one-way mirror as they opened up about labor shortages, worker strikes and banks that refuse to give loans, Charney was not surprised by their candor. The polling effort went smoothly, “like breathing,” he says, but Miller could hardly contain his excitement about the numbers. “We really think that we’ve enveloped the entire economy,” says Miller.

He gives as an example China’s official unemployment rate, a nice, placid figure perpetually hovering around 4%. Unfortunately, the measure excludes migrant and rural workers. Miller likens it to “going to Greenwich, Conn., and surveying 36-to-40-year-old white males.” The China Beige Book, on the other hand, shows a job market full of surges and undertows. Companies in some provinces report severe labor shortages; in some sectors workers have demanded higher wages. A heat map of labor strikes can show a ribbon of unrest running through the southern and central manufacturing regions and calm in the mining country out west. It shows what Miller says is the common theme of the report: “China is actually a bunch of different Chinas.”

And even if these insights into China’s hidden economy fail to impress the wider business community, the project has one trend working in its favor: big hiccups in official data. In December, when China’s economy was humming along at an 8% clip and official data showed an economy awash with easy credit, Miller says his team was seeing “huge flashing yellow lights.” Businesses in their surveys said they were struggling to secure a loan. The interest rates actually paid by firms, which they had gathered from surveys of real and shadow banks, kept climbing higher. They headlined their warnings in their first-quarter report. The next quarter, as if on cue, a credit crunch that few saw coming caused stocks to nosedive, slowing China’s economy and grabbing headlines.

Not everyone is convinced as to the merits of the China Beige Book, however. Holz expressed reservations that any private company could outperform the massive polling efforts of China’s government, but conceded, “It’s worth a shot.” The success of the China Beige Book will depend in part on proving each time that its data fits the reality better than the official accounts. This could spread to other countries with faulty economic data. “We’d be delighted if there were more beige books in the future,” says Charney. If so, perhaps investors all over the world will soon be lauding beige as the best way to stay out of the red, and firmly in the black.