2005-12-15

Stats: China Becomes 4th Economy due to Statistical Change

China will leapfrog Italy, France, and Britain to be officially recognised as the world's fourth biggest economy -- if it revises its 2004 'Gross Domestic Product' (GDP) up by 300_000_million_USD on 2005-12-20 as expected, Standard Chartered economist Mr.Stephen Green said. In a research note, Mr.Green said the additional output will also drastically improve measures of the the Asian powerhouse's economic health.
'As if China's economy was not growing fast enough, thanks to a statistical revision, growth in 2005 looks like being about 30 per cent,' Mr.Green said. 'The recent national economic survey has apparently found another 2.4 trillion yuan worth of output,' Mr.Green said.
He said the new-found figure is equivalent to 17.5 per cent of last year's GDP.
'That is equivalent to finding Indonesia or Turkey hidden in the Xinjiang deserts. 'This is not an insubstantial event,' Mr.Green said.
But he added that this revision does not directly translate into 30 per cent growth for this year as it will have to be spread out over the last few years.
'(This means) China's economy will likely have grown faster than 9.5 per cent in recent years... as if we didn't know that already,' Mr.Green said.
He said the major upward revision in output also has implications for the understanding of China's economy.
'First, China rises rapidly up the table in the world rankings of economies, from a previous seventh place in 2004 to fourth today.
'It leaps over Italy instantly with the 2004 revision, and France with GDP growth in 2005,' he said.
'With the 8 per cent fall of Britain's currency relative to the USD (and thus the yuan - CNY) this year, China will be bigger than the UK economy in USD terms too,' Mr.Green said in the note.
He said output in China is now equivalent to 18 per cent of the US American economy, and roughly 45 per cent that of Japan's.
'It also brings us several years closer to the day when China's GDP overtakes that of Japan and the US,' he said.
But Mr.Green said that far more important than these league table effects is something more tangible -- China's people just got richer.
'"Per capita" GDP rises from 10_561 yuan in 2004 previously to 14_079 in 2005,' he said.
Mr.Green said in the note that it remains to be seen exactly from where the new output is coming, as one of the perennial puzzles for economists is explaining the relatively low level of service sector contribution to China's economy.
'Back in 2003, according to the old figures, 52 per cent of GDP came from industry, and only 33 per cent from services. 'But assuming all the new activity is in services (and that is a big assumption), then we will have an economy which is 41 per cent services. 'This makes China a more normal "low-income economy" -- services usually make up about 50 per cent of GDP in such economies, compared to about 60 per cent in upper-middle income economies,' Green said.
But he said China is still an 'outlier' -- thanks to banks (and officials) preference for industrial development, rather than funding the service sector.
'We think most of the extra output is in services since the statistical apparatus is not that good at measuring the sector. 'The change will also affect our understanding of investment. 'It is still growing fast, but the economy should become a little less dependent upon it,' he said.
He said that at present, gross fixed capital formation will be about 46 per cent of GDP in 2005. If all the new output is in non-investment activities, then this ratio will drop to about 38 per cent. He said this is a much more reasonable figure, closer to the norm of Hong Kong, Singapore, Japan and South Korea during their fast growth phases, the note said.
'Those who worry about China's investment ratio being too high will be reassured. 'Those who think the banks are still not good at assessing loan applications will remain worried by all the investment activity out there ... and we put ourselves in the later camp,' Mr.Green said.
He said that the newly bolstered GDP will mean China's external debt will be nearer 10 per cent by the end of this year from 13.8 per cent at end of 2004. With non-performing loans officially at 1.28_trillion_CNY as of end 2005-09, the NPL/GDP ratio at year end of 2005 should fall from around 8.25 per cent to 7 per cent, he said.
'The IMF was looking for domestic debt at year-end 2005 to be worth 19.6 per cent of GDP. 'That can now be revised down to about 16 per cent,' Mr.Green said.
He said the budget deficit also falls with the massive GDP revision, and all these are positive for the solvency of the banking sector, as well as for the government's books.
'Of course, tax revenues as a proportion of GDP fall too -- from 20 per cent in 2004. 'But strong tax collection this year means we are not worried about that. 'Even before this revision, the debt profile looked sustainable, even including the government's implicit liabilities,' Mr.Green said.
He said much more will be known in the following weeks on the breakdown of the new output, and more insight into how the government collects and compiles its economic data.
'We are just scratching the surface here. 'In the following weeks we will ... understand more of the ramifications.
'But all in all, this is good news for China; it just got a lot bigger,' he said.
(1_USD = 8.1_CNY) 'China to be world's 4th biggest economy after GDP revision- Standard Chartered BEIJING', Yahoo! Business News, 2005-12-15 09:28am

2 Comments:

Blogger Dave said...

Anyone read 'Into The Upwave' -- and does any of this ring any bells?

12/20/2005 07:52:00 am  
Anonymous Anonymous said...

With statistics, anything is possible.

Anything that is except meaningfulness! ;-)

1/07/2006 11:42:00 pm  

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