China ‘s Economy: Statistics versus Reality

At the end of 2005, China became the world’s sixth largest economy if one were to look at the size of the Gross Domestic Product (GDP) alone. China ‘s GDP was estimated to be 15.99 trillion renminbi (RMB) i.e., around USD 1.98 trillion. It now follows the United States , Japan , Germany , Britain and France in GDP terms and is expected to emerge the fourth largest economy before the end of 2006.

It is not unusual for countries with rapid growth to witness major revisions in their GDP. In many countries around the world, the introduction of better methods of accounting such as the 1993 System of National Accounts (SNA) brought about significant revisions in GDP. For instance, in Denmark , the introduction of the 1993 SNA resulted in an upward revision of the 1996 GDP by 7.4 per cent. According to the World Bank, the order of magnitude of China ‘s revision is by no means an exception, and revisions tend to be larger for countries that grow faster. The reason behind this logic is that the many new enterprises that are established in dynamic economies are only ‘imperfectly captured’ by the prevalent statistical system. Moreover, surveys to determine GDP tend to under-represent rapidly growing enterprises. Other recent examples of an increased in GDP have been Indonesia , where a 2004 revision resulted in a 17 per cent increase in GDP; and Norway , where a 1995 revision resulted in an increase of some 11 per cent in measured GDP.

Statistics and the Chinese economy

On December 20, 2005 , China ‘s National Bureau of Statistics (NBS) announced that following the nation’s first countrywide economic census it was ‘discovered’ that China ‘s GDP had been understated by around USD 296 billion. This figure is equivalent to 17.5 per cent of the GDP for 2004. To quote Li Deshui, Director of China’s National Bureau of Statistics, “these new figures give us a clearer and a better way of understanding China ‘s economy.” Using the ‘trend deviation method’ — widely adopted by the Organisation for Economic Cooperation and Development (OECD) — most of the extra output discovered was in the services sector, which the statistical apparatus had earlier neglected to estimate. Prior to this economic census, China ‘s statisticians used to employ the Material Product System (MPS) developed under the centrally planned economic system, to arrive at an estimate of the economy.

After the revelation by the NBS, the ratio of the service sector to GDP in 2004 rose from 31.9 per cent to 40.7 per cent. The service sector’s output was revised to 6.5 trillion RMB (US$785 billion) from the previous estimate of 4.4 trillion RMB (US$531.4 billion). Significantly, the ratio of manufacturing and construction fell to 46.2 per cent from 52.9 per cent, and the share of agriculture shrank to 13.1 per cent from 15.2 per cent. The general reaction to the upward estimates of China ‘s GDP have been favourable. Bert Hoffman, chief of the economics unit of the World Bank Office in Beijing , said that the data provides “better information on the current status of China ‘s economy as well as on structural issues such as the sectoral shares of the economy.” The new data is also considered very timely and will benefit the implementation of the 11th Five-Year Plan (2006-10).

The NBS raised its estimates of GDP growth for every year but one during the period 1993-2004, meaning that China ‘s buoyant economy has been growing even more rapidly, sometimes at rates above 10 per cent. To some extent this vindicates the views of many independent economists who believed that China’s true economic growth over the past several years has been substantially understated by official figures (although, equally, it is strange that the NBS has revised upwards GDP growth for 1999 and 2000, given the widely held view that GDP growth at the time was in fact lower than official estimates). The figures also mean that China ‘s rates of exports and investment are smaller as a percentage of the total economy, easing the fears of many analysts that they were unsustainably high.

Among the most eye-catching revisions are those to GDP growth in 2004 and 2003. Real GDP in 2004 was raised to 10.1 per cent from 9.5 per cent previously, and similarly that for 2003 has been raised to 10 per cent from 9.5 per cent. In the 12 years covered by the revisions, only the GDP growth figure for 1998 — the year of the Asian financial crisis — has remained unchanged, at 7.8 per cent. Back in 1993, at the height of China ‘s previous economic boom, the economy is now seen as having grown by 14 per cent (up from 13.5 per cent previously). As a result of the latest changes, the NBS says the country’s average annual rate of GDP growth since 1979 is 9.6 per cent, which it says represents an increase of 0.2 percentage points.

Rationalising China ‘s economic growth

Interestingly, two arguments central to China ‘s GDP revision are now doing the rounds. The first argues that China had deliberately falsified its economic performance data prior to its accession to the WTO in December 2001. In the long drawn process that preceded China joining the WTO (formerly the General Agreement on Trade and Tariffs) since 1986, trade negotiators had to decide whether China was to be entitled to “developing country” status as a WTO Member. Ordinarily, this status is self-designated by WTO Members based on factors such as relative GDP per capita. A developing country status entitles a Member to take advantage of transition periods for implementing various WTO Agreement obligations, and it reduces the level of trade concessions that the Member is expected to make in negotiations. China ‘s trade officials asserted that it was a “developing country” and secured concessions of a transitory nature that stretch to twelve years from the date of accession. Article 15 of the document on China ‘s accession to the WTO conditionally defines China as a “non-market economy country.” In other words, China will be considered a market economy not before 2013, despite the fact that its trading volumes are estimated to be around 60 per cent of GDP currently.

The second argument is that China is indeed bringing its financial statements and data to international levels of conformity and that the system is becoming more transparent. Lack of an independent national statistics agency, in this view, was the major reason behind the unreliability of economic statistics, as local authorities tended to ‘massage’ statistics to advance their careers within the Party. The upward revision of the GDP is an instance of China ‘s confidence and adaptability to a more globalised world. The government said that exports in 2005 were a record $762 billion, up 28 per cent, while imports climbed to $660 billion, up nearly 18 per cent. Total foreign trade topped USD 1.4 trillion, making China the world’s third largest foreign trader after the United States and Germany by overtaking Japan . China ‘s trade surplus with the rest of the world tripled in 2005 to a record $102 billion, a figure that could reignite global trade frictions and also step up pressure on China to allow its currency to appreciate further.

Conclusion

For the ‘fourth generation leadership’ represented by Hu Jintao and Wen Jiabao, the first national economic census is an endeavour that portrays the functioning of government bureaus in a transparent and responsible manner. The importance attached to the economic census can be gauged by the fact that the entire exercise took place under the directives of the State Council. The survey’s leading group was headed by Vice Premier Zeng Peiyan, with provincial and local governments at all levels as well as concerned departments participating in the event. More than three million enumerators and supervisors were recruited, and another 10 million statisticians and accountants from government agencies, enterprises and institutions were mobilised to participate in the survey. The survey is also an indicator to the outside world that China is willing to adhere and adopt international standards of estimating national income, which will undoubtedly put to rest constant complaints about the statistics that China generates.