People pass a construction site in Beijing on Nov. 18. (WANG ZHAO/AFP/Getty Images)
Summary
New methods in China's national accounting system will better reflect the country's economic and social realities and help Beijing implement reforms while also softening the impact of slower economic growth down the line. The Chinese National Bureau of Statistics announced the changes, which were decided upon following the recently concluded Third Plenum, on Nov. 16. The new methodology will result in an upward revision of Chinese gross domestic product as the country's leadership attempts to change the public's expectations and emphasize the importance of moving beyond a focus on gross domestic product as the main measure of economic performance.
The announced changes came less than a week after a key policy document was released by the Third Plenum. The document, which offered a blueprint for the country's next phase of reform, stressed the need to phase out the traditional growth-oriented development model. The country's leadership is also emphasizing the importance of growing GDP through innovation and quality upgrades rather than through sheer increases in size and scale. China's leaders hope the accounting reforms and changes in perception will curb the politicization of statistics, a phenomenon that leads local officials to overestimate their region's economic growth.
Analysis
There will be five major adjustments in the GDP accounting system by the end of 2014 or by early 2015, according to Xu Xianchun, the deputy director of the National Bureau of Statistics. The new system will include companies' research and development costs and will count employee stock options as a form of labor compensation. It will also employ new methods to determine the value of privately owned houses, rural land transfers and some of the central bank's financial intermediation services.
The methods will reportedly help Beijing keep pace with the timeline for the implantation of the United Nations' 2008 System of National Accounts as well as with the United States' newly amended accounting system. They will also coincide with the 2014 National Economic Census, the next attempt to measure the economy comprehensively for the purpose of establishing benchmarks for the next five years of monthly, quarterly and annual reporting.
Issues in Chinese Economic Statistics
Although China has seen marked progress in modernizing its statistical system since entering the World Trade Organization in 2001, its recent economic weakness has renewed skepticism about the quality of its national accounting. The country still shows a GDP growth rate above 7 percent, which is considerably higher than that of other developing nations. In addition, there are questions about discrepancies between central and provincial statistics as well as doubts about industrial output, non-bank lending and extremely low unemployment and inflation rates. The belief that China's accounting is inaccurate, often due to manipulation and falsification, has led many outsiders to question the real size and growth of the Chinese economy.
A Conversation on China's Economy
Until recently, the Chinese central government seemed less concerned with statistical discrepancies and reform than in using high growth rates to preserve its political legitimacy. However, with Beijing now seeking a more balanced, consumption-driven economy, it needs more nuanced and accurate statistics to ensure proper economic management.
The Chinese accounting system's survey methodology and data collection are substantially different from those of the West -- and frequently are outdated. For instance, China relies on the net output of industries as its primary measure of GDP, while most Western countries use actual expenditures. While technically an acceptable method, China's approach at times has encouraged undesirable oversupply at the expense of market needs, and the expenditure approach has been slow to catch up. China's system of having corporations report statistics directly to the government has become more difficult over time, leading to higher thresholds for reporting that cut off smaller companies. China is increasing the use of sample surveys to make up for such gaps, but questions remain about how effective these surveys are, and reform is ongoing.
Moreover, while China does publish inflation-adjusted real GDP growth, the official inflation rate does not take into account price fluctuations in important sectors, including real estate, and is therefore not reliable. As a result, one important reform China will have to undertake before its GDP measurements can be considered reliable will be to improve the transparency and accuracy of its consumer price index.
At the same time, the absence of a central authority and unified statistical bureaucracy makes national accounting highly dependent on the reporting from each political unit, from township to the national government. Combined with a highly bureaucratic promotion structure and the fact that economic growth has been emphasized as a fundamental state goal since the 1980s, this system has led to wildly inflated data at the local and provincial levels.
Intended Goal
The new methods offer a chance for China's leadership to improve its knowledge of rapidly changing economic structures while also cushioning against slower GDP growth. Once economic weaknesses are revealed and the politicization of statistics is reduced, there will be an inevitable decline in the economic growth rate and, possibly, in the overall confidence in the Chinese economy.
However, as is often seen in revisions in Western countries, accounting changes can easily add a few percentage points to a country's GDP. For example, changes in U.S. accounting this year added 3 percent to the country's GDP. China's 2004 economic census led to an upward revision of GDP of 16.8 percent, and the 2009 census led to a 4.4 percent upward revision, mostly on the basis of incorporating China's larger-than-expected services sector.
The National Bureau of Statistics said the changes could affect a portion of the economy that accounts for more than 5 percent of GDP. According to the bureau, research and development expenditures alone account for about 2 percent of GDP, or about $163 billion in 2012. But the more significant categories to be revised involve private housing prices and financial intermediation services. A 2011 study by the bureau concluded that a proper calculation on the cost of rent, particularly among undocumented immigrants, could increase household consumption by 8 percent, or from 35 percent of GDP in 2010 to about 37 percent of GDP. Meanwhile, rough estimates of the compensation to farmers who have lost land (which is not the same as the transfer of land-use rights) and employee stock option benefits could amount to 1 percent of GDP or more, depending on how the government implements the reforms and how rapidly stock options grow.
Aside from the political benefits, Beijing hopes the new accounting system will help it better manage the economy. Among the important changes, the upgrading of research and development accounting will incentivize investment in research and development, advancing the goal of transforming the economic growth into one driven by innovation. Meanwhile, by including rural land transfer revenues, the new system could help the leadership fulfill its pledge to boost income for rural residents by giving them more property rights.
Reforming China's accounting system is a critical component of the overall reform agenda. Sweeping away old-fashioned statistical methods, incorporating international standards, conducting another national census and modernizing data collection in fast-changing sectors will likely yield substantial increases in China's baseline gross GDP. They will also make future growth estimates more accurate, even at a time when the Party leadership is emphasizing the need to measure economic performance in more qualitative ways.
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