China Implements New GDP Calculation System

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Last updated at: (Beijing Time) Thursday, August 14, 2003

China Implements New GDP Calculation System

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China is expected to offer the most accurate statistics on its gross domestic product (GDP) in its history this year, but it will take at least another three years to amend the loopholes that have contributed to the serious underestimation of the portion supplied by the nation's service sector.

China has adopted a completely new GDP calculation method for 2003 based on the 1993 SNA (System of National Accounts) standards jointly formulated by the United Nations, the World Bank, the International Monetary Fund, the Organization for Economic Co-operation and Development and the European Union, said Xu Xianchun, director general of the Economic Verification Department of the National Bureau of Statistics (NBS).

The new method supplants some contents of the Guideline for Measuring GDP and National Income initiated by the State Council in 1992, including calculations concerning national income, fiscal credit balance, collective consumption and social consumption.

"The most drastic change involving the service sector, however, is that the new method does not recognize a division of 'material production sectors' from non-material production sectors," Xu said.

According to experts, the new method lays a solid foundation for the solution of two of major economic statistical problems in China.

One concerns the overestimation of the output value of the industrial and agricultural sectors, said Yue Ximing, a researcher with the economic research institute of the China Academy of Social Sciences, and the other involves the serious underestimation of the thriving service sector.

The overestimation of industrial and agricultural output is the result of some local governments exaggerating "achievements" in the name of political career development, said Zhang Shuguang, head of the Tianze Economic Research Institute, but the national GDP figures will not change much as they strike a balance between the overvaluation with the underestimation of the service sector.

However, none of the economists and officials China Daily spoke with could provide detailed figures indicating just how great the undervaluation has been.

"It will take another three years for an extensive co-operation project between the NBS and the Asian Development Bank (ADB) to yield significant results, which will aid the creation of a scientific statistical mechanism for assessing the service sector," Xu said.

Calculated corrections

The ADB announced late last month plans to provide US$450,000 in technical assistance to help the NBS improve its statistical evaluation of the service sector.

Even if the NBS-ADB project produces a solution, some statistical errors cannot be avoided completely.

For instance, including financial information about illegal services, such as drug sales and trafficking, as well as the sex trade, will be difficult under the new mechanism, according to NBS Minister Li Deshui.

The main reason is too many obstacles impede the collection of information from such services, said Li, although they should be counted in the GDP figures according to SNA standards.

Meanwhile, the NBS has decided to conduct a new nationwide survey of the service sector. The last time a similar survey was taken was in 1994.

Despite the fast growth of the sector, China is still making calculations based on the last survey, and the margin of error this can mean in terms of decision-making is frightening, Yue said.

The upcoming survey will go a long way towards painting a truer picture of the sector, said Yue, but more importantly, China must establish a regular statistical system capable of providing reliable figures for the sector during the next 10 years.

The severe underestimation of both the output value and added value of China's service sector is generally acknowledged as the "soft rib" of the national GDP statistics, in that it is not necessarily regarded as crucial, but neither is it to be dismissed.

According to official statistics, the proportion that the service sector appears to account for in China's GDP falls below the average level of 40 per cent registered in developing countries.

Furthermore, the sector ranks 107th in the world in terms of workforce numbers, coming in behind far smaller countries such as Laos, the Sudan and Bangladesh.

In fact, if calculated in constant prices over the last 20 years, according to official statistics, the sector's portion of the GDP has not changed at all during that time, Zhang said. And if counted according to variable prices, the ratio has actually been decreasing.

"The figures obviously fail to reflect the reality of the fast development of the sector during the period," Zhang added.

Although it is difficult to estimate how much the sector is undervaluated, officials and experts agree that the shortage of basic statistics is the fundamental reason for its misrepresentation.

For instance, Yue said, a family living in a government-subsidized two-bedroom apartment in Beijing enjoys an extra monthly income of 2,000 yuan (US$240), meaning the apartment should be counted twice in the GDP according to SNA standards, first as the output value of the developer and then as the income of the family.

But neither were actually included in the GDP statistics, he said.

Similarly, the income teachers earn from leading training courses not considered part of their regular classes are not taken into account in statistical calculations, Yue said. Such phenomena are common, especially among non-profit institutions.

Yue said the new calculation mechanism could help improve information gathering in the sector, but the results would depend on how the new methods are implemented.

Statistics collection will undoubtedly prove too hard a nut to crack because there are too many grey areas in a sector characterized by a wide variety of services, he added.

Changing statistics

Initially, the People's Republic of China borrowed the MPS (Material Product System) mechanism practised by the former Soviet Union and Eastern European countries in the early 1950s, Xu said.

The MPS method, which stresses the collection of output data in physical terms, dominated economic statistics in China until 1984.

Up until then, the national economy was entirely planned and the MPS conformed to the country's economic structure and level of social development.

However, the introduction of economic reforms in the late 1970s gradually wrought conceptual changes in the national accounts system.

During the period from 1985 to 1992, the MPS and SNA co-existed, with the national income calculated according to the MPS and the GDP arrived at by the SNA methods employed by most developed countries at the time.

Both systems were also used to reckon input-output tables for the "planned market socialism" of the period.

The State Council initiated a massive push for nationwide adoption of the SNA in August 1992, but, Xu said, the national accounting systems still retained some of the MPS calculation methods.

As of this year, however, China is fully embracing the SNA.

The lack of transparency surrounding GDP statistics, regardless of which system is used, was the key reason for concerns about the accuracy of China's economic growth statistics, Zhang said.

He noted that most of the Western economists and officials questioning China's GDP growth figures tend to focus their doubts on the overestimation of the manufacturing sector, ignoring the undervaluation of the service sector.

The new accounting system will help bring China's economic statistics in line with international practices.

With the new system, China's economic statistics will be comparable with those of most countries using the same standards and can, therefore, be verified with the same measures.

However, he pointed out, only with accurate service sector figures will China's economic statistics be considered complete and reflect the true picture of the nation's economic development.

The new GDP calculation method

The new GDP calculation method addresses the two major economic statistical problems in China: the overestimation of the output value of the industrial and agricultural sectors, and the serious underestimation of the thriving service sector.

The overestimation of industrial and agricultural output is the result of some local governments exaggerating 'achievements' in the name of political career development.

Most of the Western economists and officials questioning China's GDP growth figures tend to focus their doubts on the overestimation of the manufacturing sector, ignoring the undervaluation of the service sector.

Collecting financial information about illegal services, such as drug sales and trafficking, as well as the sex trade, will still be difficult under the new mechanism.

The NBS has decided to conduct a new nationwide survey of the service sector soon. The last time a similar survey was taken was in 1994.

Background:

The MPS (Material Product System) is based on balance tables measuring, for example, the balance between production, consumption and accumulation of the gross social product; the balance between production, distribution, redistribution and final use of the gross social product; the balance of labour resources; and the balance of fixed assets.

The MPS sorts a country's economic activities into one of two categories: material production and non-material services. Only the former creates national income, while the latter consumes that income. The main indicators in the MPS rely entirely upon this assumption.

In the MPS framework, industry, agriculture and construction are wholly included in the material production category, while transportation, communications and commerce are only partially included.

Erasing the distinction between material production and non-material services essentially conforms to the coverage of economic activities in the SNA method of calculation. The major difference between the two systems is that the separation of non-material services from material production constitutes the basis of economic analyses in the MPS methodology.

The SNA, which originated in developed economies, is now practised by most countries around the world. Five international institutions, including the United Nations, the World Bank, the International Monetary Fund, the Organization for Economic Co-operation and Development and the European Union, devised the SNA's standards in 1993.

China's new national accounting system, which goes into operation this year, is based on a calculation system revision that began in 1999 according to SNA standards. (China Daily HK Edition)

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