What the tale of Luckin Coffee tells us about Chinese economic growth

A few years ago, the China Hustle, a programme which launched on Netflix made waves that led to the loss of billions of dollars in savings as investors in the Chinese firms that had been highlighted by the documentary realised their stock was worthless. These firms had been able to get into the market in the first place only through backdoor reverse takeovers, ultimately overstating their profit and revenue in the hope of finding Americans eager to cash in on the Chinese miracle of 8% a year growth whilst the rest of the world still floundered from the 2008 crash. The film ends with a not to subtle warning that suggests even large, well known firms such as Alibaba may be hiding something.

The recent news that Luckin Coffee, China’s homegrown Starbucks, has been fined $180 million for cooking its books, overstating its 2019 revenue while understating a net loss brings the necessity of transparency in China back to the fore once more. The company had listed in New York last year to much fanfare but was subsequently delisted in April after this scandal initially came to light. Not only had they fabricated their retail sales to a tune of over $300 million, they also sought to hide their fraud by creating a fake operations database and increasing expenses by more than $190 million.

Dodgy businesses exist everywhere – it’s the nature of freer markets. The difference is, that in the West with greater transparency, they can be found out, and usually are. In China, where a face-saving culture alongside fear of losing status, being thrown in jail or worse exists, the truth is likely to be covered up if it doesn’t reflect well on the whole.

China has a history of understating the bad and overstating the good. During the Great Leap Forward between 1958 and 1960, exaggerated claims from local cadres, who were encouraged to do so by provincial officials who in turn had been encouraged by officials from Beijing, misled central planners into believing they had hit the jackpot. It is likely over 30 million Chinese citizens died of starvation as a result of mid-level officials being too scared to tell the truth to their bosses out of fear of retribution. Sound familiar?

Look no further than their recent triumphant announcement that they’d ‘officially eliminated poverty’ as the final counties of Guizhou province cleared the Government defined poverty line (half the World Bank’s level) of 4,000 Yuan in annual income. Deeply impressive, I might add, and truly an achievement that deserves genuine applause in a country that had almost 70% of its people in poverty in 1990. One can’t help be slightly sceptical though - they might have eliminated extreme poverty, but with 600 million people still with an income of barely 1,000 Yuan a month, many ‘Lao Bai Xing’ have still not cleared the hurdles of hunger that this announcement seemed to suggest. It’s also worth adding that the target for the poverty alleviation program, as set by Xi in 2014, was for the end of 2020, ahead of the 100th anniversary of the founding of the Communist Party, and failing to meet targets hasn’t boded well for officials in Chinese history. It’s not right to say they’re lying about alleviating poverty, but it’s hard to argue they aren’t exaggerating how successful they’ve been when a third of the country on average still lives at below $140 per month.

The pandemic, like the Great Leap Forward, has led to the death of millions. Both were caused by mid-level Chinese Communist officials failing to tell the truth to their bosses. If the Chinese Communist Party won’t tell the truth when lives are on the line, who’s to say they would tell the truth about their economic figures. The Communist Party made an unwritten contract with its people that, in exchange for their political silence, they would have large economic rewards. If their legitimacy is based on economic success, it’s certainly plausible that they’re exaggerating the true size of their economy. I’m not suggesting China’s economy didn’t go through the miracle growth of the 1990s and 2000s, nor that they won’t some day take over the US in GDP terms. But what cases like Luckin Coffee’s show, is that we shouldn’t accept as fact whatever the Chinese say about their levels of growth. Let’s not forget, the official death toll for the Great Leap Forward was only 17 million people.