August 09, 2008

Is China's economy being underestimated by official statistics ?

China's gross domestic product(GDP) totalled 13.0619 trillion yuan (1.9062 trillion U.S.dollars) in the first half of 2008, a 10.4 percent increase year on year. 3.8 trillion pace for the year. Assuming another 5% increase in the second half of the year and the currency strengthening from 6.85 to 6.65 then China's GDP would be at just over 4 trillion at the end of 2008.

The case was made by JXie at Fool's mountain that China's economic statistics are still being underestimated.

The main reasons [for believing that China's GDP is underestimated] are:

#1 China’s GDP deflator is larger and likely overstated compared to the US’. For instance, the 2Q08 China GDP deflator was at implicit 10.6%; and the 2Q08 US GDP deflator was at supposed 1.1%. The difference is breathtakingly extraordinary if you consider CNY was quite a bit stronger than USD between 3Q07 and 2Q08.

#2 China had a one-time 16.8% upward GDP revision in 2005, mostly readjusted for its understated service economy. Was the revision a one-time event, or likely repeated down the road? In 2007, the service economy of China was 39% of the total economy. For instance, Egypt, which has a roughly 30% lower per capita GDP, has its service economy at 54% of the total economy. Is China’s service economy less developed than Egypt’s, or is it simply understated by the Chinese statisticians — that will require further upward revisions down the road? I tend to believe it’s the latter. For anyone who has traveled to Egypt, judged by the available restaurants, shopping malls, and the number of domestic leisure travelers, it’s very hard to fathom China’s service economy isn’t anything but far more developed that Egypt’s.

How fast can CNY rise?
Black Swan: the yuan replaces the US dollar as the world reserve and trade currency.
Assume the Chinese yuan followed what the Brazilian Real did between 2003 and 2008. Brazil benefited from rising commodity prices and sounder monetary and fiscal policies, has seen its currency compared to USD per Big Mac Index rising from 48% undervalued, to 34% overvalued. Big Mac currency fair value is 3.5 yuan to one US dollar. 33% overvalued would be 2.6 yuan to one US dollar. (the Euro also swung from undervalued to overvalued over an 7-8 year timeframe). If the yuan had a move to that level then China’s GDP would overtake the US economy in 2013.

This sites analysis has been that China would overtake the USA in 2016. China's GDP deflator and service economy evidence of an underestimated economy are interesting observations and could suggest another 12-20% of the Chinese economy is under reported. However, a move to that strong a currency seems unlikely. China's economic leaders would try to fight it. It also assumes US and probably european currency weakness for another 5-8 years. If the economy were underestimated by 12-20% than a 2015 passing of the US economy could be possible.


Tom Craver said...

I wonder how China's GDP would look, if one treated it as if it were the two separate countries it sort of resembles - a modern, hyper-dynamic urban country, and a relatively impoverished rural country.

bw said...

Population estimate 1.33 billion in 2007 (0.6% increase) Add in Hong Kong and Macau 8 million.
Total population in 2008 1.35 billion.

The overall GDP is 3.6 trillion and heading to 4 trillion this year with growth and exchange rate increases.

The bottom one billion would approximate the economy of India but would be richer by 200% [US$2 trillion, or kind of like India plus Mexico with a bit fewer people] and the then the top 350 million (including Hong Kong) would be like Brazil but richer and more populated by 60%.

The top 4 provinces in China in terms of GDP plus Shanghai and Hong Kong.

Guangdong 3.2 trillion yuan
[US$470 billion, $5k/per cap]
Shandong 2.7 trillion
[US$390 billion, $4k/per cap]
Jiangsu 2.6 T yuan
[US$380 billion]
Zhejiang 1.9 T yuan
[US$280 billion]
Shanghai US$165B(U$9000 per cap)
Hong Kong US$218B in 2008

330 million people
US$1.9 trillion GDP.

The provincial GDP has jumped from 1350.2 billion RMB in 2002, to 3060.6 billion RMB in 2007, with an average annual growth of 14.5%. About US$500 billion. Its ratio in proportion to the national GDP increased from 1/9 to 1/8. Guangdong’s GDP, after overtaking those of Singapore and Hong Kong, has surpassed that of Taiwan. Guangdong’s GDP per capita has reached 4000 US dollars. Guangdong population at the end of 2007 is 94.49 million

In 2007, the nominal GDP for Shandong was 2.59 trillion yuan (US$340 billion), ranking second in the country (behind Guangdong and ahead of Jiangsu). It's GDP per capita was 27,723 yuan (US$3,646), ranking seventh.

Shanghai 18.5 million
US$157.8 billion (7th)
Per cap US$8,949 (13th)
Population (2006)
75,495,000 (5th)
GDP (2007)
CNY 2.56 trillion (3rd)
CNY 33,689 (5th) per cap GDP

Population (2004)
47,200,000 (11th)

GDP (2007)
CNY 1.86 trillion (4th)
CNY 37,128 (4th) per capita