China's stock market took a breather after plunging this week, pulling global markets down with it. But the financial turbulence rocking China has brought to the surface a deeper fear: That its economy is sinking, and that its downfall will derail the still-fragile economic recovery going on in other parts of the world.
What makes those fears worse is that few people have a good understanding of how well China's economy is really doing.
The country's official growth figures paint a rosy picture that any country would aspire to: In the third quarter, China said its economy expanded 6.9 percent from the previous year, far above US growth of 2 percent.
"Not a lot," says Mark Williams, the chief Asia economist at Capital Economics, a research consultancy based in London.
"They are absolute make-believe," says Leland Miller, the president of China Beige Book International, which compiles private surveys on the Chinese economy.
China's economy has been gradually slowing from the double-digit rates it recorded in past decades, due to a variety of factors, some of which are the inevitable result of many years of fast growth, and some of which are not.
Billionaire investor George Soros believes the world could be headed towards a new global financial crisis. "When I look at the financial markets there is a serious challenge which reminds me of the crisis we had in 2008," he told a recent an economic forum.
"Unfortunately China has a major adjustment problem and it has a lot of choices and it can actually transfer to the rest of the world its own problems by devaluing its currency and that is what China is doing. We are facing a very serious transitional problem which is quite recent and it is, I would say, (a situation) that amounts to a crisis, and we are at the beginning of that."
Experts widely disagree on exactly how much the economy has slowed. While some analysts estimate the growth in China's gross domestic product (GDP) at as little as 1 or 2 percent, other estimates are higher, even if not as high as the country's official read.
Williams' firm - which set up its own measure for Chinese economic growth in 2009 based on figures like cargo freight volumes - believes China's economy is likely growing at 4 or 4.5 percent. The chart below shows how his firm's estimates for China's growth have recently sunk below the official figures:
Miller's firm estimates that China's current growth is around 4.5 percent, though he calls the focus on GDP "sort of a distraction," since GDP reflects aggregate growth, rather than the type of real productive economic activity that is sustainable and leads to more growth. "If China wants to generate aggregate growth, all it has to do is build a bridge, tear it down, build a bridge, tear it down, and keep going," he says.
China denies allegations that it cooks its books.
China does not underestimate its GDP deflator and we don't overestimate our GDP.
The question of China's official growth statistics is one of credibility.
If the country is overstating growth a bit, then it might mean that the world economy will be a bit weaker in coming years than expected. If it is overstating it a lot, it could mean China's government is really worried about whether it is coming in for a hard landing, with far more serious implications for both the country and the global economy.
Many analysts say political pressure is certainly behind the inflated numbers. Achieving growth targets is a matter of political importance in China, and there's evidence that someone somewhere is fiddling with the numbers.
For one thing, China's No. 2 leader, Li Keqiang, admitted as much in 2007.
A diplomatic cable released to the public by Wikileaks quoted Li as saying during a dinner that GDP figures were "man-made" and therefore unreliable. Li said he personally looked at electric consumption, rail cargo and loans disbursed for a clue to how the economy was operating, rather than official growth figures.
"All other figures, especially GDP statistics, are 'for reference only,' he said smiling," the cable reads.
There's also a lot of numerical evidence that something fishy is going on.
In most years, if you add together the estimates that each of China's 31 provinces give for their economic activity that year, you'll get a figure that is much larger than Beijing's independent calculation of what each sector produced that year. So much larger, in fact, that it looks like China is missing an entire province - suggesting that local leaders are being more than a little optimistic about their growth.
According to calculations by Capital Economics, the wealth of other economic data coming out of China suggests that GDP figures are overstated. And China's growth figures in times of economic turmoil - like the Asian financial crisis - have been suspiciously steady. Unlike most emerging economies, China's "real growth rates are uncannily stable from quarter to quarter, which suggests that there is routine smoothing going on," Williams wrote in a note in October.
A man stands in front of an electronic board displaying share prices at a securities exchange house in Shanghai, China. Photo / Bloomberg
The culprits are usually thought to be the official growth targets that leaders set for different provinces and the country as a whole.
For decades, China has set an official economic growth target as part of its "Five-Year Plan," which is exactly what it sounds like - a wide-sweeping development plan for the country for the next five years. In order to be promoted, officials at all levels must do their part to meet the goals in the Five-Year Plan.
China always manages to meet its annual growth targets. And despite growing evidence that the economy slowed in 2015, leaders have said that the country will still meet its goal of growth "around 7 percent."
Westerners sometimes describe China's record of satisfying these growth targets as a conspiracy - as if someone in a back room at China's statistics bureau is tasked with changing 0s to 7s until all the numbers add up.
In reality, the errors may be much more widespread and haphazard than that.
When statisticians calculate growth, they have to make a lot of assumptions about missing data. In most countries there are errors in both positive and negative directions.
But because there is political pressure in China to hit a growth rate that is close to the official target, "all those interventions tend to push the figure in one direction," says Williams.
A trader works on the floor of the New York Stock Exchange. Stock markets around the world have suffered since trading began this year. Photo / Getty Images
Many Western analysts have argued that China should scrap this growth target altogether, instead putting its focus on unemployment and inflation, like most developed countries do.
I think that the only way that China will be able to hit its targets over the next five years would be in the short term to pursue some very undesirable stimulus policies, which would only create bigger problems down the road, or by faking the numbers.
Setting a growth target not only distorts China's official statistics, it is also likely bad for its economy, since it can encourage short-sighted policies that boost growth right now and hurt the economy later - like taking out more loans or building wasteful infrastructure - rather than a focus on more sustainable growth.
But China seems unlikely to do away with targets anytime soon.
In November, President Xi Jinping announced the country's new targets for the next five years: Average annual economic growth of 6.5 percent between 2016 and 2020.
As Andrew Batson, the research director for economic research firm GaveKal Dragonomics, explained, China's puzzling devotion to growth targets is all about politics, not economics.
The targets that Xi recently announced put the country in line to reach an economic level in 2020 that his predecessors Hu Jintao, Jiang Zemin and Deng Xiaoping all aimed at before him.
In China's one-party system, following the goals of past leaders, especially Deng Xiaoping, the father of China's economic reforms, is just good politics. The targets "are a way by which successive Chinese leaders have tied themselves to the legacy of Deng Xiaoping, and thereby increased their own legitimacy," writes Batson.
Unfortunately for Xi, China's economy may refuse to cooperate with these political aims. China's economy has been slowing, due to its aging population, wasteful spending, a build-up of debt, and other factors. As the chart below shows, the gap between China's growth targets and its actual growth has narrowed significantly in recent years.
So the setting of a relatively high target of 6.5 percent growth for the next five years - a time in which economic forces are likely to continue to drag on China's economy - suggests that we could see a lot more fiddled growth figures to come.
"I think that the only way that China will be able to hit its targets over the next five years would be in the short term to pursue some very undesirable stimulus policies, which would only create bigger problems down the road, or by faking the numbers," says Williams.
