A new analysis by NAB has indicated that outdated accounting methods may understate, rather than overstate, the size of the Chinese economy.
In a new China Economic Update, NAB Group Economics suggested that outdated accounting methodology may understate the scale of the China’s economy.
According to the update, China’s approach is based on the 1993 System of National Accounts and not the 2008 methodology used by other advanced economies.
The methodology used by China “provides a relatively narrow coverage of activity in a range of service sectors, including research and development, real estate and finance – meaning that some economic activity isn’t currently being counted”.
In September, China’s National Bureau of Statistics (NBS) revised its estimate for the country’s GDP from 7.4 per cent in 2014 to 7.3 per cent. The revision was attributed to a weaker growth rate within China’s services sector.
“Despite this weaker growth profile, services have been the strongest growing component of China’s economy for the past three years, as well as being the key driver of growth in the first half of 2015," the report said.
Referring to a new study by the Center for Strategic and International Studies (CSIS), NAB said that adopting the latest methodology would result in a significant increase in the estimated size of the Chinese economy.
NAB said this is “in stark contrast to the most recent downside revision for 2014”.
Further, NAB said: “The study re-estimated China’s nominal GDP for 2008 and suggested that the economy was between 13 per cent and 16 per cent larger under the current methodology.
“This is consistent with major upward revisions in advanced economies when they switched to this approach.
“The CSIS paper also highlights that a larger Chinese economy changes a number of key ratios – resulting in a lower debt-to-GDP ratio, higher labour productivity and lower energy intensity (energy consumption per unit of GDP)," said NAB.
NAB said an upgrade of China’s national accounting methodology was scheduled to occur between late 2014 and early 2015; however, it has not yet been completed.
“Notwithstanding the technical challenges of adopting a broader methodology, there may be other factors contributing to the delay, including the political importance of China’s annual growth target.
“While moving to the current international methodology would almost certainly result in an upward revision to the overall scale of China’s economy, it would likely result in a slower rate of growth – since additional economic activity would be coming off a larger base," the report said.