Posted on 12/17/2005 7:07:38 AM PST by snowsislander
Shanghai. December 15. INTERFAX-CHINA - China's plan to add about USD 300 bln to the country's 2004 GDP number, which would make it the world's fourth largest economy, has been in the pipeline for years, economists surveyed by Interfax said.
"It's not a big surprise," Jim Walker, chief economist for investment bank Credit Lyonnais Securities Asia (CLSA), said. "I think everybody thought the size of China's economy was badly understated."
China is expected to revise its 2004 GDP numbers as part of the country's first national economic census, which was conducted by the National Bureau of Statistics (NBS). The results of the census will be released December 20, an NBS spokesperson told Interfax Thursday.
The GDP revision will probably add as much as USD 300 bln to the country's 2004 number, representing a 20% increase over the previously stated number, Hong Kong-based newspaper The South China Morning Post reported, citing unidentified sources.
Revising GDP numbers upward is common for developing countries, Andy Xie, chief economist for Morgan Stanley Asia-Pacific, said.
China held off on changing how it calculated GDP in order to facilitate its entry into the World Trade Organization in 2001, Walker said. By having a lower GDP number, China was able to negotiate its entry into the WTO as a poor country. A revised and higher GDP could have forced China to negotiate its entry as a middle-income nation, which would have meant giving more concessions to other WTO members.
However, as part of its WTO entry, China did agree to adhere to the International Monetary Fund's method for calculating GDP starting from 2006. China's revision of its 2004 GDP number at the end of this year is being carried out to meet that commitment, Walker said.
The revision of China's GDP calculation method also allows the country to include 'gray income' in its GDP number, which would give a clearer picture of the Chinese economy's cycles and development.
"[Developing countries] can add under-the-table earnings to official statistics through government revisions," Xie said.
However, because a substantial portion of the USD 300 bln that will be added to China's 2004 GDP will be 'gray earnings,' the new GDP number is unlike to give a good picture of the average standard of living for most Chinese citizens. China's new GDP number will push it ahead of Italy, France, and the United Kingdom, making the Chinese economy the fourth largest in the world, behind only Germany, Japan, and the United States. But the standard of living for Chinese citizens has not improved as quickly, due largely to structural problems that have led to unbalanced economic development.
"About two-thirds of the country's earnings are obtained from government investment and exports, which won't reach the common people," Xie said.
China's economic imbalances and the growing gap between the country's rich and poor have led to a number of protests across the country. However, CLSA's Walker said that this imbalance was an unavoidable part of economic development.
"I don't think countries with balanced growth do well," Walker said. "When growth is balanced, growth is pretty much stopped."
Furthermore, although the change to how China calculates GDP will significantly increase the country's GDP number for last year, the Chinese economy is actually expected to see slowed growth in the next few years. Economists surveyed by Interfax agreed that China's GDP would grow by about 9% for 2005, but forecasts for 2006 and 2007 ranged from a high of 8.6% to a low of 3%.
Ma Jun, a senior economist for Deutsche Bank AG based in Hong Kong, said he expected China's GDP growth rate to grow by 8.6% next year, slowed by weaker investment and exports.
"An investment drop will lead to thinner margins in the country, while exports will decline due to the higher value of the Chinese Yuan and trade barriers," Ma said.
Morgan Stanley's Xie said he expected China's GDP to grow by 7.8% in 2006 and 7.5% in 2007, slowed mainly by fewer exports.
"Chinese exports are expected to decrease by between 15% to 30% in coming years, which will strain the country's GDP growth," Xie said.
The lowest forecast for Chinese GDP growth came from CLSA's Walker, who said he expected growth to fall to 5% next year and to 3% in 2007. Higher manufacturing costs, lower margins, intensified price competition, and overcapacity are expected to cut into the profitability of companies doing business in China, which would substantially lower investment in the country, Walker said.
"It is not a bad thing, it's just cyclical," Walker said, "It could be pretty painful for 12-18 months, but the economy will be in much better sharp afterwards."
The Businessweek article has these interesting paragraphs:
GREATER PURSE POWER. "Over the last few years, everyone has been very concerned about overinvestment in China," says Green. "This brings China closer to the norm for a globalizing country."
China's services sector amounts to much more than most thought, too. Services are expected to account for as much as 40% of GDP, compared with last year's official 33%. It also proves consumption is much larger, perhaps 60% of GDP. That will certainly please Chinese economic policymakers, who have long aimed to wean the mainland from excessive reliance on investment and exports, and boost the spending power of the Chinese consumer.
"This undercuts the common view that Chinese consumers are chronically weak," Jonathan Anderson, chief economist for Asia at UBS Securities, wrote in a Dec. 14 report.
SIGNS OF AFFLUENCE. There's even good news for China's long-troubled banking sector. Official figures show that nonperforming loans added up to $158 billion at the end of September. That's still huge, but a bigger economy makes the problem more manageable. With the revised figures on GDP, China's dud loans would represent 7% of GDP, compared with the 8.25% that had been previously thought.
Similarly, China's ratio of external debt to GDP falls to about 10% in 2005, from 13.8% at the end of last year. "People have been very concerned about the rate of lending in China and the growth of nonperforming loans, and this shows they are moving in the right direction," Green says. "Worries about a debt crisis or a banking crisis in China are currently not that serious."
Finally, the census shows Chinese people are wealthier. That may come as little surprise to anyone who has seen all the new Buicks (GM ), Hyundais, and Chevys on the streets, as well as the Motorola (MOT ), Nokia (NOK ), and other cell phones in people's pockets.
Now, it appears the numbers will start to better match the perception. China's 2004 estimated per capita urban GDP of $1,277 will grow to $1,738 for 2005. That newly revealed spending power will certainly delight multinationals diving into the mainland market, though it -- and the rest of the new data -- may also spur increased hand-wringing in global capitals over China's meteoric rise.
The US can add US$300 billion to GDP with only 3% growth.
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