China’s policymakers have chanted a mantra over the past year, about the need to “re-balance” economic growth away from a dangerous over-reliance on excessive investment in favour of greater consumption.
This re-balancing, they argued, would cut wasteful spending on barely profitable manufacturing plants and help alleviate one of the most sensitive out-of-kilter areas, the swelling bilateral trade balance with the US.
Almost overnight, it seems, the leaders’ prayers might have been partially answered by what many would argue is a long overdue re-balancing of a different kind – the way in which China collects the data it uses to calculate the size of its economy.
The upward revision of Chinese gross domestic product, possibly by as much as 20 per cent, follows the conclusion of a big economic census earlier this year, an epic statistical survey involving 10m data collectors dispatched across the country to register large hubs of business not picked up in conventional reporting.
The data collectors have recorded for the first time many street-level private businesses once not picked up GDP surveys – small factories, shops and the restaurants, hair salons, bars and karaoke lounges that blossomed throughout China in the past decade.
The more precise measurement of activity also means the bureau will give the rapidly growing parts of the economy, such as the service sector, a greater weight in calculating output.
These two factors combined mean that the official size of the Chinese economy will not only be much bigger but its structure over time will look different as well.
“Consistency requires that a revision of the GDP on the production side will eventually be matched by a revision on the demand side,” said a Beijing-based economist.
The result, according to Jonathan Anderson of UBS, the brokerage, is that the share of investment in GDP will fall slightly and the share of consumption will rise. China’s savings rate is also expected to be lower once all the figures have been recalibrated.
“Suddenly, all of those outrageous numbers about the Chinese economy are going to look much better,” he said. The “outrageous numbers” include an average investment-to-GDP ratio of about 40 per cent for two decades, nearer to 50 per cent at the moment – far higher than normal for an economy.
China also has an aggregate savings ratio of about 50 per cent of GDP.
Even after a revision, China will still have very high investment and savings rates but they may not be much higher than many other Asian economies were when they were growing rapidly.
The upward revision is not a surprise to long-time watchers of the Chinese economy.
Mr Anderson said in a report last month that economists “routinely conclude that Chinese national accounts still miss a significant portion of the private services sector and that ‘actual’ GDP could be 20 per cent higher”.
“Given that small-scale services are much less
capital-intensive than the rest of the economy, revising the level of GDP upwards would naturally result in a lower investment ratio, one that would look much more in line with the historical figures from the rest of the region,” he wrote.
Song Guoqing, a prominent economist at Peking University, agrees, saying the revision might help “dismiss concerns over inadequate domestic demand over the last few years”.
The initial announcement by the NBS may be the first of a series of revisions of Chinese GDP to capture changes in investment and consumption but it is clear that in the long-run, the Chinese economy is going to look different – and bigger.