China's "Real" GDP

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In the past decade 2001-2010, the Chinese economy leapfrogged the three leading European countries – France, Britain and German – and Japan to become the world's second largest economy. And it is almost a consensus that it is just a matter of time, in 10 to 20 years, when China will surpass the USA and regain its position as the world's top economy. At this moment, a natural question mark is, how accountable are China's GDP data?

There are a number of easy reasons to be sceptical, especially China's bureaucracy set-up in which local officials tend to exaggerate the sizes of local economies. However, when looking into the statistical system, the answer may be just the opposite, that is, the real size of China's economy is actually underestimated by GDP figures.

Two obvious examples. In early 2006, China's data agency the National Bureau of Statistics (NBS) revised up the size of economy for 2004 by 16.8%. Meanwhile, the NBS upgraded the GDP growth paces of 1993-2004, based on China's first-ever national economic census in 2004.

Again, after China's second national economic census in 2008, the NBS revised up its estimate for the size of economy in 2008 by 4.4%.

In both censuses, the NBS found that its estimates of the primary sector, that is, agriculture, were basically correct and it tended to modestly underestimate the secondary sector which covers industry and construction. However, the census results of the tertiary sector, or services, turned out to be far bigger than NBS' estimates.

The reason lies in history. China had adopted Soviet Union's statistical system until 1992. The system attached importance to agriculture and industry. With such a tradition, China had established an extensive network in calculating agricultural and industrial output. Especially, in 2001, China required 5,000 biggest industrial enterprises to report their financial figures directly to the NBS, thus greatly reducing the distortions by local officials.

Under the Soviet system, the service sector, except for transportation, was regarded as inglorious as it did not create "tangible value". Without the tangible value it means that data like salaries and taxes are used in order to calculate the output of service providers. However, because China has not established a reliable database for salaries, the output data of services are actually rough estimates.

The biggest problem here is housing services. Internationally, the common method to calculate the output of this sector is based on housing rentals. However, China's housing lease market is far too fragmented and complicated. So, the NBS chose to use housing depreciation as an alternative. Such a method tends to underestimate the actual size of the housing service sector, especially in a market where housing prices surged five-fold or more in the past decade. In 2009, the NBS said housing services accounted for barely 5% of China's GDP. As a comparison, this sector typically represents 10-15% in developed nations and even some 10% in India.

What is more, the category of government expenditure, especially military and police expenses, is also underestimated. Meanwhile, the service sector in China's vast rural area, which, even after the roaring urban expansion in the past two decades, is still home to over 50% of the population, is not fully reflected in GDP figures.

In fact, there is little benefit for Beijing to boast its economy up by 10% or 20%. On the global stage, a bigger economy may even be undesirable to the pragmatic Chinese government as it could bring about bigger responsibilities, say, more emission reduction.

Domestically, the time when Chinese feel proud of any fast GDP growth or the sheer size of the Chinese economy has long gone. The common mood now is that average bread-earners do not share enough fruits from China's growth.

Moreover, inflation is always a top concern. Therefore, if, say, the NBS adopts the real housing rentals, GDP will be bigger, but at the same time, consumer inflation, which is already very fast, will become even more speedy and make the working class more angry.

So, to exaggerate or to underestimate GDP, it is not a hard choice for Beijing.