China's increasing economic data censorship is raising the risks for American investors and financial service companies that rely on Chinese economic reports to effectively do business.
According to the United States-China Economic and Security Review Commission's 2021 Report to Congress, the Chinese government has increased its efforts to censor economic data such as inflation and unemployment rates. The report also claims China regularly and preemptively informs media outlets to not disclose politically sensitive information to the public.
"Economic censorship increases financial and commercial risk for countries, entities, and individuals exposed to China who are unable to obtain accurate information on the performance of its economy," according to the report. "In particular, China’s government has tried to contain unofficial estimates of inflation, seemingly to influence market dynamics, and unemployment, which is highly politically sensitive."
Concerned about potential security breaches, China passed a data-security law in September 2021, Reuters reported. The law requires companies to classify their data into categories, directs how data is stored and transferred to outside entities. Noncompliance could lead to fines up to 10 million yuan or criminal charges.
The new data-security practices aimed at Chinese companies makes it more difficult for foreign investors and companies to obtain important data to make sound decisions regarding supplies and financial statements, according to Wall Street Journal. Companies are often risk averse from a lack of data and information because the lack of information increases the risk of fraud and scams.
The data-security law is ambiguous enough that Chinese companies are unaware of what constitutes “sensitive information” to the point where companies are reluctant to share information as they may unknowingly breach the law and put themselves at risk of being penalized.
"There is no list, there is no annex, there are no examples," Nicolas Bahmanyar, senior consultant at Beijing-based law firm LEAF told Reuters. "So, we’re a little bit in the dark here."
According to Yale Insights, fudged numbers, be it a nation’s gross domestic product or a company’s financial statements, make it more difficult for investors and policy makers to make accurate decisions. According to research by Frank Zhang, a Yale School of Management accounting professor, China has manipulated and inflated the GDP that it presents to the world.
Decisions to engage with China should be based on other economic indicators that are less easily manipulated, such as electricity usage or freight volume, Zhang said.
Since Zhang’s report was published, the Chinese government, in an attempt to tamp down on manipulation, began requiring companies to report their performance to the national statistics bureau. Zhang still recommends relying on other economic indicators, however.
“The easiest thing people can do is rely less on the GDP numbers,” he said.