Macroscope | How an accounting quirk led to a huge miss in gauging the real size of China’s economic muscle
An outdated accounting methodology in use by China’s official statisticians has led the world into underestimating the size of the economy and the real role of the consumer as a driver of growth, according to one study
The accuracy of China’s economic data has often been called into question, with critics suggesting that the country’s growth rate is overstated. However less attention is paid to the country’s outdated national accounting methodology – which may instead understate the overall scale of China’s economy.
Moving to the international standard – already planned but delayed – could show that the transition in China’s economic growth model has progressed further than previously understood.
In early September, China’s National Bureau of Statistics (NBS) released revised estimates for the country’s gross domestic product, which showed weaker than previously reported growth in 2014. In January, the NBS estimated China’s economic growth at 7.4% in 2014, however this was cut to 7.3% in the September revision – given 32 billion yuan was cut from the 2014 level.
A weaker estimated growth rate for China’s services sector was the main driver to the GDP revision. For the full year, the services sector grew by 7.8% according to the latest estimates, compared with 8.1% growth reported in January. Despite this weaker growth profile, services have been the strongest growing component of China’s economy for the past three years, as well as being the key driver of growth in the first half of 2015.
The National Development and Reform Commission (NDRC) defended the country’s economic data in late September, stating that critics questioning the credibility of the figures did so without “strict and sound research”. They noted that partial indicators, such as electricity output and rail freight volumes fail to capture the growth in services. The NDRC argued that China is on track to achieve its 2015 growth target of “around 7%” – which may be more easily achieved given the slightly smaller size of China’s economy in 2014.
One of the key challenges in comparing China’s economic growth with international peers is that China’s national accounting methodology is comparatively dated. China’s approach is based on the 1993 System of National Accounts (as opposed to the 2008 methodology that is used by advanced economies), which provides a relatively narrow coverage of activity in a range of service sectors, including research & development, real estate and finance – meaning that some economic activity isn’t currently being counted.
A new study published by the Centre for Strategic and International Studies (CSIS) suggests that adopting the latest methodology would lead to a significant increase in the estimated size of China’s economy – in stark contrast to the most recent downward revision for 2014. The study re-estimated China’s nominal GDP for 2008 and suggested that the economy was between 13% and 16% larger under the current methodology. This is consistent with major upward revisions in advanced economies when they switched to this approach.