What China's balance sheet tells us about the state of the economy

The Chinese Academy of Social Sciences has just published a book on China's national balance sheet in 2013. Led by Dr Li Yang, the academy's vice-president and director of its Institute of Finance and Banking, a team of academy researchers has built on an earlier study by Dr Ma Jun, currently chief economist at the People's Bank of China.

For the first time, the study reveals a rich and fascinating series of data that one can use for comparison with other countries. In the past, most economic analyses have focused on flows - the amount of annual trade, investments or gross domestic product.

Balance sheet data, by contrast, reveals stocks outstanding at a point of time. They are much more difficult to compile, because of valuation and measurement problems.

It is only in recent years that economists have begun to realise that a study of balance sheets is critical to detecting an economy's state of robustness or its fragilities, particularly at the sectoral level. Dr Richard Koo, chief economist at Nomura Research Institute, has famously said that Japanese deflation and the most recent global financial crisis were balance sheet crises, an analysis now accepted by most economists.

We all worry about asset bubbles, but we cannot assess whether these bubbles are fatal for the economy unless we have a handle on their scale and the way they are financed.

The United States, for example, has probably the best series of balance sheet data through its quarterly flow of funds analysis published by the Federal Reserve Board.