Ramin Nakisa, global macro strategist at UBS, discusses what he sees as a bifurcated economy in China and analyses hints coming from the country’s economic data.
China's National Bureau of Statistics has modernised its tools for measuring the $10 trillion-plus economy and cut down on provincial exaggeration, but old Soviet influences remain.
Just 19 days after the fourth quarter ended, China will tell the world how its economy performed -- almost a month before Japan, and two months before New Zealand.
Such speed is but one reason behind skepticism about how well China's economic reports inform the financial world. The growth tally,due Tuesday at 3pm, (NZ Time) takes on added significance this time around, as plunging mainland stocks and a weakening yuan shake global markets from copper to South Africa's rand and even US blue chips.
The National Bureau of Statistics has modernised its tools for measuring the $10 trillion-plus economy and cut down on provincial exaggeration, but old Soviet influences remain, such as an emphasis on production, not the spending method used in most advanced economies. And China is trying to better capture services activity, a bright spot in an economy shifting away from old drivers like residential construction and low-end exports.
The Communist Party vowed to double 2010 output and income levels by 2020, a goal President Xi Jinping has stressed needs an average 6.5 per cent expansion in the next few years to achieve.
While politicians the world over are prone to boast or bemoan their nation's growth rates, economic expansion has added significance in China as the figures are routinely compared against pre-set growth targets, another hangover from the Soviets.
That means a full-year or fourth-quarter reading below the 6.9 per cent forecast by economists for both periods could add to calls to stimulate the economy with more government spending and monetary easing, while a better-than forecast reading may relieve such pressure. Recent data, including a better-than- estimated trade report Wednesday, have generally pointed to a broad stabilisation, albeit at lower levels.
To be sure, incentives to massage data are diminishing as top officials stress other factors such as cleaning up the environment and cutting debt as key to long-term growth. The NBS has developed better ways to handle regional data -- for example, collecting it directly from companies and households rather than local governments.
Here's a guide to how China compiles the main growth figure the world is waiting for:
Number crunchers for most advanced economies such as the United States come up with their gross domestic product figures using the expenditure approach -- summing investment, consumption and net exports. China instead adopts a mix of the income and production methods, which focus on the production side of the economy.
The NBS breaks down the economy into 94 sectors in its annual GDP compilation, and 35 sectors for quarterly reports, according to a statistics bureau handbook from 2013.
Annual data from 51 of the 94 sectors -- such as agriculture, industry and financial services -- are easier to get, gathered from survey responses or collated from financial and administrative records to calculate the total value-added of each. They comprise about 55 per cent of GDP.
The output of another 32 sectors -- including construction, retail, property and accommodation -- are based on data from subsets of each sector. Output is then extrapolated to the entire sector, based on the share of each subset during a census year. These partially-covered sectors make up 40 per cent of GDP.
Pedestrians holding umbrellas walk past a Gucci luxury goods store in Shanghai in October. Photo / Bloomberg
The last 5 per cent of GDP is drawn from 11 other sectors, from information technology services to household services to warehouse storage, which have even fewer data points available. For those, the NBS typically relies on related indicators, then multiplies the growth pace with a base year's output to extrapolate the total size of the sector.
Data on all sectors can come from NBS surveys as well as financial and administrative records of various government organizations. For instance, those for the financial sector come from records of regulators such as the People's Bank of China and China Banking Regulatory Commission, while those for transportation and postal services are a combination of NBS surveys, financial records of the Ministry of Transportation and major state-owned companies, as well as administrative records from tax authorities.
Slicing, dicing
Once China -- home to almost a fifth of the world's population -- measures data on everything from building thousands of kilometres of high-speed rail lines to street vendors selling dumplings in remote towns, reports are aggregated, refined and packaged for release about 15 days after each quarter ends. Annual readings take a few days longer.
Initial reports on the estimates usually include just one paragraph stating the year-on-year growth rate and the GDP level, with a footnote for quarter-on-quarter figures. More information is provided the next morning, when a breakdown on roughly ten sectors gives greater detail on what's leading and lagging the overall rate.
A more granular report for the full-year 2015 will be released in February, followed by a first revision published in September. The final revision won't be released until May 2017.
A pedestrian holding an umbrella walks past a Louis Vuitton store in Shanghai in October. Photo / Bloomberg
What's new
Most sectors with partial or scant information are services industries, which now comprise more than half of total economic output and are central to China's re-balancing story.
The NBS -- which conducts an economic census about every five years surveying more than 70 million companies and small businesses -- last year revised up the size of 2013 GDP, adding almost the equivalent to Malaysia's full-year output, largely due to an increase in the contribution from services.
The 2015 figure -- with its refreshed base provided by the census -- should offer a more accurate accounting of the increasingly important services sector.
The Tuesday release will also be the first annual report after the NBS upgraded how it compiles quarterly readings to meet International Monetary Fund standards. The authority used to provide cumulative data only, from which quarterly readings were extrapolated.
While some economist doubts centre around whether China's growth rates are inflated or smoothed out, the revisionism charges can go both ways. While Harry Wu of Hitotsubashi University in Tokyo estimates the size of economic output may actually be about a third smaller than official data suggest, Rhodium Group's Daniel Rosen said the size of the economy as measured in 2008 may in fact be up to 16 per cent larger than posted.
Though debate about China's data may flare anew Tuesday, at least the NBS waits until the quarter has ended to publish its growth figures. Neighboring Vietnam released its preliminary fourth-quarter GDP report on December 26.
