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China's quality growth drive may prompt local governments to come clean

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China's quality growth drive may prompt local governments to come clean

China's new focus on quality growth as it seeks to curb both financial excess and pollution reduces the pressure on the country's local governments, notorious for cooking their books, to falsify economic data in order to meet national targets and curry favor with Beijing, economists said.

The 2018 GDP growth target of around 6.5% is lower than the 6.9% expansion in 2017. Not only will it reduce the pressure on local administrations to exaggerate their economic performance, but a crackdown on their off-balance sheet financing vehicles will stymie growth just as a sweeping bureaucratic revamp proposed on March 13, which will place regional branches of state taxation administrations under closer control from the central government, will make it more difficult to fib, said Chen Xingdong, chief China economist at BNP Paribas in Beijing.

"That will further dampen local governments' ability to inflate fiscal data," Chen noted.

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China's regional data has long been regarded by analysts, and even the Chinese government, with skepticism. In January, the Inner Mongolia Autonomous Region and a special economic zone in the municipality of Tianjin both admitted they faked data in 2016. Liaoning, a rust-belt northeastern province, had already confessed to similar offenses between 2011 and 2014.

"Three battles"

More revelations are likely. In December 2017, the National Audit Office said it identified 10 areas, including parts of Chongqing City and Yunan, Hunan and Jilin provinces, that had exaggerated fiscal income.

President Xi Jinping, who consolidated his power last year and now has the option of serving for life, has called for "three battles" to be fought until 2020, against financial risks, poverty and pollution. Local governments have often powered their economies by pumping up the balance sheets of affiliate financing vehicles backed by implicit guarantees, but these are coming under increasing scrutiny. The "battle" against pollution will also restrict expansion in regions reliant on heavy industry, like Inner Mongolia and Liaoning.

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"They will find themselves in the [central government's] cross hairs if they dare to fake statistics now," said Zhou Hao, senior emerging markets economist at Commerzbank AG in Singapore.

This year's national growth target "isn't very high for China to achieve", said Jack Wang, a vice president and principal economist at ICBC International Research, adding that he expected the economy to expand at 6.9% again.

"It has sent a signal to local governments to emphasize quality over quantity growth," he said.

Earlier in March, Premier Li Keqiang said the government aims to expand its economy by around 6.5% in 2018, without the elaboration of "higher if possible in practice" as he put in 2017. Last year, many investors assumed the authorities wouldn't let growth sag ahead of the Communist Party's critical 19th National Congress. Now that that is out of the way, some local governments might even use the opportunity to come clean on past economic deception, Chen said.

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