Wednesday, December 16, 2015

China's 'airpocalypse now' moment highlights lethal deceit

A woman wearing a protective mask amid heavy smog at the Tiananmen Square, after the city issued its first ever "red alert" for air pollution in Beijing on Dec. 9

The first-ever air pollution red alert sounded by Beijing on Dec. 8 received the international attention it deserved. The foul, orange-tinged air suffocating the Chinese capital is the most visible failure of the performance-conscious Chinese government in delivering on its promises to clean up the country's severely degraded environment.

     We should all welcome the Beijing municipal government's public, albeit humiliating, acknowledgement of the obvious: Beijing's air is not fit for breathing. Yet, Beijing's first "red alert" raises an even more important question about the credibility of the Chinese government. Is it telling the truth about the true state of China's environmental degradation?

     Autocratic regimes are known to exaggerate their achievements and conceal their failings. And the Chinese Communist Party is no exception. For example, Beijing's economic statistics are so dodgy that the international business community have grave doubts about the veracity of Chinese data on economic growth (almost certainly overstated), unemployment (likely understated), and nonperforming loans (deliberately underreported). 


     Systemic falsification of vital economic data may make the Chinese government look more competent, but also can boomerang on the very government that has turned data-concoction into a fine art. The first victim, in fact, is the Chinese government itself. Leaders in Zhongnanhai, headquarters of the CCP and the State Council, need accurate data to make decisions. But since local officials, driven by the same incentives that motivate the regime to report fake data, routinely overstate good news and hide bad news, top Chinese leaders face enormous difficulties in learning the truth.

     For example, Premier Li Keqiang, the country's top economic policymaker, candidly shared with a former U.S. ambassador his doubts on official provincial gross domestic product growth numbers which, in his view, "are for reference only." Subsequently, he developed his own system of estimating economic growth based on power consumption and railway freight volumes.

     Today, perhaps even more critical than GDP datum is the health of China's banking system. As we know, China has gone through a credit binge that has pushed its debt-to-GDP ratio to 280%. Based on international experience, credit binges end in banking crises without fail.

     But you would not know this if you trust officially reported numbers on nonperforming loans. According to data released by the China Banking Regulatory Commission, nonperforming loans at the end of September stood at 1.59% of total outstanding credit in commercial banks. However, according to a recent survey of 112 executives from Chinese banks and asset management firms conducted by China Oriental Asset Management, 90% of them said official data on nonperforming loans were understated. A third of them believed that such data were "seriously understated."

     A close analysis of official data on nonperforming loans by ratings agency Moody's Investors Service also found a serious inconsistency. Chinese commercial banks reported an increase in nonperforming loans of 25 basis points in the first half of 2015. The increase in loans that were overdue by 90 days or more, a vital measure of loan quality, was much higher at 77 basis points, implying the deterioration of loan quality was underreported.

     For business executives, doctored numbers could mean bad decisions and investments. But for ordinary Chinese people, fabricated data can kill.

'Killer' data

Nowhere is the lethality of deceit more evident than in the systemic understatement of China's environmental degradation. Estimates by scientists suggest that people living in northern China lose five years of their life expectancy due to air pollution alone. 


     But those residing in the regions blighted by air pollution would not know the dark truth if they took official data at face value. According to the China Statistical Yearbook, the most authoritative compilation of socioeconomic data issued annually by the State Statistics Bureau, coal consumption rose more than three times, from 1.05 billion tons to 3.52 billion tons, from 1990 to 2012. But the amount of sulfur dioxide, a pollutant byproduct from coal burning, showed no commensurate increase. The Ministry of Environmental Protection's data for 1993-2011 registered an increase of only 57% in the amount of sulfur dioxide released into the air.

     It thus came as no surprise that air quality, as reported by the Ministry of Environmental Protection, showed a miraculous improvement in the period. Cities meeting the standard of Grade II (relatively clean air) rose from 50% to 90% in the 1993-2011 period. This is, of course, pure fiction. When the Chinese government adopted a more stringent measurement system in 2014, 90% of the cities were found to have failed to meet air quality standards.

     Right before Beijing's air pollution red alert, a retired senior official of the Ministry of Environmental Protection publicly claimed that China has understated its SO2 emission by at least 50%. According to Luo Jianhua, half of China's coal is consumed in steel mills and other factories that have not installed scrubbing equipment that would remove SO2, but official data on SO2 discharges do not reflect this fact.

     Like the questionable numbers on air pollution, Chinese statistics on water pollution also make little sense. According to the Ministry of Environmental Protection, the volume of wastewater discharged into Chinese rivers and lakes nearly doubled from 35.5 billion tons to 69.5 billion tons between 1993 and 2013, but water quality, again, mysteriously improved. In 1993, slightly more than half of the sections of the seven major river systems monitored by the ministry were considered clean; but in 2013, the number rose to 65%.

     One might attribute such improvement to better compliance by Chinese companies and local governments with environmental standards. But that does not appear to be the case. The ministry itself has publicly acknowledged that local governments and Chinese companies routinely fake environmental data, especially those concerning the amount of pollutants discharged into the air and waters. If one types into Google the words "the Ministry of Environmental Protection publishes names of entities faking reports on discharge of pollutants" in Chinese, more than 160,000 results will pop up. A search of the same term using Chinese search engine Baidu will generate 1.66 million results.

    In the wake of Beijing's air pollution red alert, the Chinese government's focus has been mostly on technical fixes. While these are obviously needed, they do not address one of the weakest links in the Chinese system: untrustworthy vital information. Successful environmental remediation is inconceivable when the real extent of environmental degradation is deliberately and systematically concealed. Let us hope that the Chinese government will have learned a critical lesson from Beijing's latest episode of "airpocalypse" and issue a new and even more badly needed red alert: on fictitious official data of all kinds.

Minxin Pei is a professor of government at Claremont McKenna College.


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