These Guys Think China’s Economy Is Much Larger

As the world awaits China’s third-quarter gross domestic product (GDP) figures on Monday, the accuracy of mainland data is once again up for debate.

A growing section of financial market participants and journalists has speculated that recent numbers might be painting a more flattering picture of the world’s second largest economy than is the reality.

But according to research, China’s economy is likely much bigger than official data suggest.

In a report published by research institution Center for Strategic and International Studies (CSIS) last month, Daniel Rosen and Beibei Bao showed that 2008 GDP was actually 13-16 percent larger than official figures, while 2013 GDP stood at $10.5 trillion rather than the official $9.5 trillion.

What might explain this mismatch? The authors think the difference could be explained by how China calculates, or does not calculate, economic activity.

China currently measures GDP using the United Nations System of National Accounts standards set in 1993, which has a narrower coverage of services sector, while the bulk of developed nations use the latest standards set in 2008.

“At the broadest sector level, the hard to count services cluster is in greatest need of upward revision: 22.2 percent in our estimate,” Rosen and Bao said. Services actually surpassed the industrial sector in terms of biggest contribution to GDP in 2009, not 2012 as official data now suggest, they added.

Perhaps most noteworthy was the fact that property—often labeled as one of China’s top risks—led the service sector’s upward revisions. The real estate sector was around 133 percent larger in 2008, “suggesting that GDP growth has been even more dependent on a property boom than previously understood.”

The authors also pointed out key elements that aren’t covered in China’s official GDP, such as the capitalization of research and development (R&D) investment. “China does not publish value-added data for R&D, but according to our calculations, officials are underestimating R&D value-added by $6.5 to $154 billion a year.”

So, what do these new calculations mean? China isn’t doing as badly as recent headlines suggest.

The debt to GDP picture is less dire, gross output per worker is slightly higher, indicating better labor productivity and the energy intensity of GDP is lower than previously observed, Rosen and Bao explain.


Craig Erlam
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the BBC and The Telegraph, and he also appears regularly as a guest commentator on Bloomberg TV, CNBC, FOX Business and BNN. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.