China’s Slowdown Poses Credibility Test for Economic Data

Last week, Premier

Li Keqiang

warned that the economy was in some ways facing a tougher test than in 2020. On a conference call, he urged national and regional officials to do more to support businesses, protect jobs and ensure the economy posts growth in the second quarter, according to state media.

The question for many economists now is how closely the flow of official data will stick to economic reality as the rest of the year progresses.

One lesson economists say they have drawn from scrutinizing Chinese statistics is to be on the lookout for discrepancies in China’s data when the economy is at a turning point—as it appears to be now—or at moments of special political significance.

Later this year, Mr. Xi will seek to overturn recent precedent and secure a third term in power, a move that would be more easily choreographed against a backdrop of healthy growth. He has already instructed officials to ensure China’s growth outpaces the U.S.’s in 2022.

The depth of the economic slowdown leaves Beijing with only a few options, economists say: Accept a much slower rate of growth than the government’s goal of around 5.5% for 2022, change or scrap that target, or fudge the figures.

“This will be a real test, and I expect them to be massaged. The question is the degree of massaging that is occurring,” said

Rory Green,

head of China and Asia research at consulting firm TS Lombard in London.

China’s National Bureau of Statistics didn’t respond to a request for comment.

Concerns over statistical integrity in China aren’t new. Part of the problem is fraud.

“The problem of statistical data fraud is still relatively prominent,” China’s top discipline watchdog said in March, saying some officials are tempted to advance their careers by fabricating or inflating data to paint a rosier picture of growth and development in areas under their control.

Beijing has responded by empowering China’s National Bureau of Statistics to carry out inspections in provincial administrations and government departments suspected of cooking the books. Hundreds of state officials and companies have in recent years been punished for violating statistics laws. On Friday, the statistics bureau said its inspectors uncovered instances of falsifying data in 2020 and 2021 in provinces including Henan, Hebei and Guizhou.

A review of local government releases by The Wall Street Journal found that in March, statistics experts in at least 10 Chinese provinces visited major local companies to check activity data from the first two months of the year, when national-level growth figures released by Beijing struck many economists as being far rosier than expected from surveys and other preliminary data.

But fraud isn’t the only issue, economists say. Many have for years flagged apparent mismatches between signals coming from official and nonofficial data sources. Official measures of house prices, for instance, can tell a different story than the marketing materials and earnings reports of big developers.

There can also be inconsistencies between top-level indicators such as gross domestic product and the economic picture presented by second-tier data, such as bank loans, rail freight volumes and energy consumption. Another concern is how official data is adjusted to account for factors such as currency swings and inflation.

Both official and nonofficial data show growth in China is collapsing. Lockdowns have crippled factories in China’s industrial heartlands and brought major cities like Shanghai to a standstill. With the real-estate sector sinking and overseas demand for its exports fading, most economists think that means China’s economy right now is close to flatlining, if not experiencing an outright contraction.

China’s statistics bureau this month reported that retail sales shrank 11.1% in April from a year earlier, the steepest drop since March 2020. Industrial production fell 2.9% from a year earlier, led by a collapse in car production as Covid-19 swept through key production centers in and around Shanghai and in northeastern Jilin province, official data showed. Year-over-year growth in fixed-asset investment, including infrastructure and real-estate projects, slowed to 6.8% for the first four months of the year from 9.3% for the first quarter.

For some economists, that data looked credible. “The data for April were closer to reality than expected,” said Craig Botham, chief China economist at Pantheon Macroeconomics in London, in a note to clients.

China’s government and central bank have unveiled a variety of stimulus measures aimed at powering the economy during the second half of the year. They include big spending on infrastructure and policies aimed at reviving the housing market, including cuts to mortgage rates—especially for first-time buyers.

Many economists are skeptical that such measures can propel a big rebound as long as Beijing sticks with its zero-tolerance approach to snuffing out Covid-19 outbreaks with severe restrictions on economic activity and daily life.

Logan Wright, director of China markets research at Rhodium Group in Hong Kong, said he thinks the 5.5% target is “completely out the window” and suspects the government might soon drop it.

“We probably won’t hear anything else about it,” he said.

Mr. Green, of TS Lombard, said the scale of the economic damage in April gave Beijing little choice but to report credible data, just as it did for the first quarter of 2020 when the virus first struck. Official data then showed the economy shrank 6.8% from a year earlier, marking the worst quarter for growth at least since records began in 1992 and probably since the death of Chairman Mao Zedong in 1976.

Mr. Green said officials will have more scope to flatter official growth figures when economic activity resumes, perhaps by cutting the size of the economy in the previous year to boost the year-over-year comparison.

“All national statistics bodies undertake revisions. However, in China adjustments tend to occur for political gains rather than accuracy,” he said.

Still, many analysts and economists say a variety of alternative sources to the official data mean that obscuring the true state of China’s economy isn’t an easy task.

China’s current slowdown is evident in the earnings of multinational companies that do big business in China such as

Apple Inc.

or

Tesla Inc.,

or in the export data published by trading partners such as Taiwan and South Korea. Economists can also pore over business surveys, satellite images and a host of quirkier indicators such as trucking volumes and cement production.

Such indicators are becoming more valuable as China itself is more wary of what data it shares with the outside world. A data-security law introduced last year has made it harder for foreign companies and investors to get information from within China, including financial statements from partner companies and details about supplies. The law went into effect on Sept. 1 after Chinese officials grew concerned about the transfer of potentially sensitive data overseas. It subjects almost all data-related activities to government oversight, including their collection, storage, use and transmission.

Iris Pang,

chief economist for Greater China at ING in Hong Kong, said she thinks the quality of China’s economic data is better than it was a few years ago, but that confidence in the numbers could be helped if authorities published more detailed data on the economic activity underpinning the headline figures.

“Every economist would like to have more data on everything,” she said.

—Xiao Xiao in Beijing contributed to this article.

Write to Jason Douglas at jason.douglas@wsj.com