Just how big is China’s economy?

HONG KONG: Economists’ efforts to get a measure of China’s economy in some sense mirror the endeavour of seven blind men to describe an elephant from a rudimentary touch-and-feel experience: Even if they are able to grasp the notion that it is huge, they haven’t the foggiest idea just how big it is.

 

There are countless pitfalls in any standard econometrics model that attempts to assess China’s economy for size: This was validated most recently on Tuesday when Beijing revised upwards the gross domestic product (GDP) figures for 2004 by about $262 billion. The revised figures for 2004, based on a new economic census that revealed an under-reporting of the service sector’s size, peg China’s GDP at about $1.98 trillion; this makes it the world’s sixth largest economy - behind the US, Japan, Germany, Britain and France.

 

The official acknowledgement that the Chinese economy is actually 16.8% bigger than estimated earlier translates, loosely speaking, into a “bonus growth” of equal measure, virtually overnight. It is also symptomatic of a larger concern relating to the reliability of official statistics.

 

This scepticism comes about as a result of two reasons. One, of course, is that, like all big developing countries, China too has a large underground economy. As former finance minister Jaswant Singh once said in an Indian context, you can get a real sense of an economy only by “smelling its underarms”. By that, he meant that vast numbers of grassroots entrepreneurs in the hinterlands - owners of roadside dhabas, mechanics, panwallahs and so on - may remain outside the income tax network, but nevertheless contribute significantly to national wealth. So too in China, there are countless businesses, most typically in the service sector, that fall outside the purview of government approval (and the tax network); these have traditionally remained outside of official GDP estimates.

 

But there is another reason why analysts traditionally savour official Chinese statistics with a healthy dose of salt: The suspicion that some of them may be fudged.

 

It was suspected that party officials and administrators in the provinces tended to play up economic growth - to project their good performance. However, in recent years, economic planners in Beijing have been known to emphasise a more active prioritisation of development funds towards zones that bear the official stamp of economic laggards. This has given provincial leaders, particularly in the booming east coast, a curious incentive to play down their performance by masking their genuine growth rates so as to ensure that government funds - sadly, a finite resource - are not directed elsewhere.

 

None of these suspicions of willful under-reporting of growth rates was, of course, verifiable. Nor is it possible to reconcile the conflicting claims relating to underperformance and the fear of central censure over underperformance: For instance, while resorting to under-reporting in order to garner more central funds, don’t provincial officials fear their removal for underperformance?

 

However, Tuesday’s official admission by Beijing that a new economic census had revealed that output in the service sector had been under-reported does establish that the scepticism over official statistics is not entirely without foundation. In fact, author Chi Lo notes in The Misunderstood China: Uncovering the Truth Behind the Bamboo Curtain, that the central government is profoundly embarrassed in the difficulties in reconciling economic statistics that it collects from the provinces with those that regional and local governments report in their own publications. Over 20,000 local officials, who were instrumental in fudging statistics, have been prosecuted in recent years for fraud.

 

In fact, recent efforts by central policymakers in Beijing seem directed more at ensuring that growth rates don’t come at a high ecological cost - and that expectations of future growth don’t become unrealistically high.

 

The National Development and Reform Commission has in recent times moved away from encouraging investments at all costs, and instead pitched for environment-friendly projects. Coincidentally, the policy shift comes in the wake of embarrassing incidences of toxic spills by industries into rivers that served as drinking water sources of millions of people.

 

 

China has a large underground economy, which has remained outside of official GDP estimates

 

There is also a suspicion that Chinese statistics are fudged

 

Beijing on Tuesday revised upwards its GDP figures for 2004 by $262 billion to $1.98 trillion