NAB: China's economy may be far larger than everyone thinks

Photo by Kevin Frayer/Getty Images

While doubts about the accuracy of Chinese GDP data persist, the doubters may be looking at it the wrong way around. According to analysis conducted by Gerard Burg, senior Asia economist at the NAB, the nation’s use of outdated accounting methodology could actually be grossly understating the size of the Chinese economy at present.

“The accuracy of China’s economic data has often been called into question – with critics suggesting that the country’s growth rate is overstated,” writes Burg in research note released earlier today.

“However less attention is paid to the country’s out-dated 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.”

He notes that China’s government currently uses accounting methodology from 1993 that “provides a relatively narrow coverage of activity in a range of service sectors, including research & development, real estate and finance.”

Burg believes that means some economic activity is not being captured at present.

That certainly makes sense at face value. The world was a very different place 22 years ago, with terms like e-commerce unheard of. Technology has changed, yet the accounting system used by China to measure economic activity has not.

Citing a study from the Centre for Strategic and International Studies (CSIS), Burg estimates that adopting the methodology used by advanced economies since 2008 could see the size of the Chinese economy revised upwards by between 13% and 16%, something he suggests is consistent with major upward revisions in other advanced economies when they switched to this approach.

Here’s Burg on what revisions would occur to Chinese GDP should they adopt the new accounting standards:

“The services sector was the main reason for the upward revision to GDP – reflecting the wider scope of activity under the 2008 methodology. In particular, the real estate sector (around 133% larger in calendar year 2008 than currently estimated), wholesale and retail trade (around 16% larger) and transport, storage and postal services (up around 12%) were the main sectors to record greater activity.”

To Burg, the upward revision paints the broader Chinese economy in a slightly different light, hinting that the transition in its growth model from investment to consumption started earlier than thought with services overtaking the industrial sector in 2009 rather than 2012, according to CSIS estimates.

If the updated accounting measures were applied it would also mean China’s debt-to-GDP ratio, a source of increasing concern among the investment community, particularly when private and public debt is included, would also be revised lower.

He suggests the adoption of the updated accounting system – something that was originally scheduled to occur between late 2014 to early 2015 – may have been delayed due to the Chinese government continuing to set annual growth targets.

Given the importance the government currently puts on the growth figures, Burg suggests the new accounting standards won’t be adopted until the annual growth target is abolished – with the increased size of the economy it will likely result in weaker economic growth, not something that is palatable at present.

However, when the new standards are applied, it will swell the size of China’s economy in an instant, and bring it even closer to overtaking the United States as largest economy globally.

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