China recently released its January trade data, showing export growth of 10.6% and performing way above predictions – if you believe the numbers.  Many don’t.  After last year’s round of inflated figures, stories began to appear about just how businesses were cooking the books.  For example, some corporations were sending their goods on a “round trip” to Hong Kong and back, whereby a good produced in China goes “abroad,” to count as an export for tax purposes, and then is brought back to the mainland and sold at a premium because the same good is now also an “import.” Businesses being less than honest is neither a new nor a China-specific phenomenon — but as with every accomplishment the Chinese seem to be doing it bigger and more prolifically than most.

Exports aren’t the only quarter where domestically counted economic indicators have come under criticism.  Former Prime Minister Li Keqiang was quoted in a 2007 communique recently released by Wikileaks describing the data used to report China’s GDP as “man-made.”  In 2013, a Chinese university released a Gini coefficient estimate, a measure of a country’s rich-poor gap, at .61.  A short month later the Chinese government released their first official estimate in a decade coming in at 0.47 – where 0 is perfect equality and 1 is extreme disparities in wealth. (The U.S. for comparison is a middle-of-the-pack nation with a World Bank Gini coefficient of .45).  Foreign economists familiar with China labeled the official number, politely, as ‘optimistic.’

These examples highlight two related, but separate issues: Chinese economic data is manipulated at both the macro and at the micro level.  Government offices are incentivised to report good numbers and individual firms/households are incentivised to hide their wealth and keep it out of China.  Exacerbating the government’s stranglehold on numbers with any meaning is the aggressive harassment of investigative reporters.  Last December’s reporterpocalypse, whereby in retaliation for “biased” articles Beijing held up the visas for dozens of foreign reporters, was resolved only by United States Vice President Joe Biden’s direct intervention.  Even so, China has continued the trend of kicking out individual journalists with the banning of another New York Times reporter two weeks ago.  Of course, no one has it as rough as the Chinese national reporters, who are subject to intimidation, jail time, and annual mandatory classes on how to be a loyal “marxist” reporter.

Formerly, China’s data fog wouldn’t have much global impact.  But in an age of unprecedented investment, trade, and interdependence China’s behavior is a problem for actors worldwide.  U.S. current Foreign Direct Investment in China is a cool $51 billion, most of which is tied up in manufacturing and outside of finance.  American investors need to know the true quality of the environment in which they spend U.S. dollars.  Furthermore, globalization has led to the unprecedented integration of economies whereby governments need accurate data from abroad to determine domestic competitiveness.  Finally, as the 2007 financial crises demonstrated – failure in the number one (and presumably two) global economy has consequences far beyond a single state’s borders.

Can the US or other outside forces encourage transparency?  The fact is that the United States government has little to no political capital in Beijing.  When Chinese officials are approached directly by US counterparts, their “advice” is interpreted as at best, condescending and at worst, part of a massive beltway plot to keep China down.  This situation illustrates one aspect of a global sea change where the most effective ambassadors aren’t coming from the government, they are the corporations.

For corporations however, the need for accurate information is tempered by other considerations.  Companies operating in China have an obvious vested interest in staying on the good side of local/national authorities.  It’s hard enough to get things done even when you are courting, bribing and hiring the relatives of the right people.  But that doesn’t mean we should underestimate how much China wants to attract foreign business, and the leverage that this desire gives investors.  With the roll out of Shanghai’s new Free Trade Zone, Beijing has shown its hand.  The government desperately wants to shift the focus of China’s economy away from heavy industry and towards financial and service sectors – ideally with foreign role models around to “unleash diversity and competition.”

Encouraging transparency in China, the United States’ biggest trade partner and the number two global economy, is good economic policy and a smart business strategy.  Both official and commercial actors need to participate in lobbying for transparency.  In the end, the prospects of foreign businesses in China contribute to the development of the US and the global economies.  Governments and the participating corporations are responsible for pressuring China to do the right thing, and as their relative power shifts, pressure is best applied through multiple governmental and business channels.

China is investing more in R&D than the European Union, according to soon-to-be-released data from the Organization for Economic Cooperation and Development (OECD).  This milestone reflects a multi-pronged effort by Chinese policy makers to spur economic innovation. Other measures include incentives to lure foreign educated Chinese back home,  patent targets and subsidies, and a strong emphasis on market driven change and innovation across sectors in the recent national memo from President Xi.

The Chinese strategy of focusing resources on modernization has paid big dividends for the national economy and Chinese workers since Deng Xiaoping opened China to Nixon and the world in the 1970s. First heavy than light industry flourished under focused, deliberate state nourishment, leading China to its present status as the world’s second-largest economy. But this model of state-directed development faces new challenges as the standard of living rises and factories face competition from other countries with even cheaper labor, such as Vietnam and Bangladesh. Now that Chinese workers face threats to their job security, the government is asking: How can we innovate our way up the economic value chain?

The Chinese Communist Party has long justified its political monopoly by acting as the benign steward of transformative economic growth. But as growth rates flag, the difficulty of moving toward higher-valued added activities has presented the Chinese version of “it’s the economy stupid.” Unfortunately for President Xi Jinping, the party’s authoritarian ways are antithetical to the type of culture that has traditionally led to the entrepreneurial innovation the party seeks to develop.

Innovation is inherently disruptive. But the business environment, the legal environment, and societal pressures in China combine to foster businesses and businessmen who curry favor with officialdom and make few waves. Chinese schools feature rote memorization of the “correct” answers to any and all questions, stifling any instinct a student may have to think outside the box. Recently, the government officially endorsed a rehashing of ancient Confucian thought emphasizing obedience and deference to authority. Professors who ask China to follow its own constitution and develop rule of law get sacked.  Beijing would like to believe that it can suppress freedom of speech and thought, forego a genuine rule of law, and maintain strict political control, all while building a dynamic, modern economy. It has done an impressive job of organizing the economy around the imperative of “copy to catch up.” But it’s a lot harder to force people to be creative by decree.

After decades of following Western models of economic development, Chinese politicians now denounce the predetermined path in favor of forging a new “Chinese way” of combining free markets with controlled government. Ideally, China would develop an economy driven by a flexible, creative, innovative work force without transitioning to the classically liberal social and governmental structure traditionally necessary to cultivate that kind of human capital. The writing on the wall reads: “Be creative and daring! Only at work, never in any other capacity.”  China’s attempt to quarantine innovation underpins the success or failure of their targeted economic transformation and with it the fortunes of the CCP. It is dangerous to join the chorus of voices heralding China’s downfall since 1949, but this contradiction looks like a giant roadblock on the path forward.