Taken at face value, it was sensational: in an instant, China’s gross domestic product had jumped 16.7%, leapfrogging Italy to make it the sixth-largest in the world. The real treasure was buried deeper – Beijing’s economic statistics had made a quantum leap in reliability, representing another step on the road towards transparency.
The US$285 billion in extra GDP had quietly accumulated in the back lanes of the nation, ignored by statisticians who only counted the folding money and not the loose change of China’s vast informal economy. Realizing this, the National Bureau of Statistics sent out 10 million counters to assess the contributions of bicycle repairmen, seamstresses, cobblers and micro 7-11s popping out of the nooks and crannies.
Yet seldom had such a big find meant so little in the world of finance – analysts were already well accustomed to adding an extra 20% on China’s official GDP numbers to cover what they thought was there. "We never worried about the headline GDP number," said UBS chief economist Jonathan Anderson, who put out a paper in November warning his clients not to be concerned about the gap.
"It was just annoying. We’ve been telling people, ‘Wait till the census comes out, they’re probably going to upgrade GDP,’ and sure enough, GDP is up and it is because of small services."
Cause for alarm
What had alarmed financial services clients was the high investment-to-consumption ratio that made China’s economy look precarious. If so much GDP was in fixed asset investment – effectively spent on the production – and so little assigned to consumer spending, who would buy the cars and consumer durables shooting off these new assembly lines?
As Anderson points out, the US$285 billion of service-fueled wealth did something to correct this, but a closer look at the figures shows that the swing is really not that great. "What they have said is that consumption accounts for 37.3% of GDP, up from previously 36.6%. So there has only been a 1.5% increase in consumption," said Jim Walker, chief economist with CLSA.
On that basis, Walker is predicting a cyclical downturn this year as producers in certain industrial sectors are forced to come to grips with the financial consequences of overcapacity. At its current pace, rising consumer demand is unlikely to be enough to stop companies with diminished corporate profits from asking banks for bail-outs.
One area where the US$285 billion correction has made a tangible impact is China’s GDP income per capita, which CLSA says rose from US$1,250 to US$1,400 as a result of the back street find. Technically, China crossed the have/have-not threshold in 2003 when per capita income reached US$1,000 per annum but, with the figure hovering around the lower regions of the group, no one fussed.
Now it has risen to become a "lower middle income country" it will be treated accordingly, said Walker. This could see the removal of preferential treatments accorded to poorer countries by the World Trade Organization, International Monetary Fund and UN agencies. He believes this change in China’s status will have ramifications in Washington as the currency hawks use it as grounds to renew pressure on Beijing for a revaluation of the yuan. The US$285 billion bonus may turn out to be the price paid for breathing new life into Senator Charles Schumer’s China Currency Bill, which proposes a 27.5% tariff on all US imports from China if Beijing fails to revalue its currency by at least 25%.
"It will have a political impact," said Walker. "The Schumer bill will rise again. This [GDP] news shows China is not a poor country and not entitled to poor country conditions by the WTO and other bodies, including its trading partners. There will be political repercussions."
However, despite the political tensions that may result from the GDP recalculation, Walker emphasized that the move was part of a larger objective – the replacement of old, communist era economic measuring systems with a model that conforms to international norms. "This is part of China adopting the IMF system of national accounts," he said. "It is more accurate, measuring the services sector in a way that will feed into the national accounts next year in line with the IMF requirements."
Kent Yau, deputy research chief at Core Pacific-Yamaichi, agrees that the new GDP figures represent a significant progression in the reliability of Chinese economic statistics. "Today, their numbers are in line with reality," he said. "I don’t think they deliberately underreported, but this has really straightened things out."