Should this report be a source of worry for the US, India and the World?

[David Farber <dave () farber net>]

Begin forwarded message:

From: Ram Narayanan <ram () usindiafriendship us>
Date: December 21, 2005 9:57:51 AM EST
To: dave () farber net
Subject: Should this report be a source of worry for the US, India  
and the World?

Dear Dave:

Looks like China is more than a miracle!

Should this NEW YORK TIMES report be a source of worry for the US,  
India and the World?

Will it galvanize the rest of the world, especially India in  
cooperation with the US, to significantly raise its growth rate to  
match China’s?

That’s the trillion dollar question for the 21st century.

Cheers,

Ram Narayanan
US India Friendship
http://www.usindiafriendship.net


http://www.nytimes.com/2005/12/21/business/worldbusiness/21yuan.html

THE NEW YORK TIMES, DECEMBER 21, 2005

That Blur? It’s China, Moving Up in the Pack

By DAVID BARBOZA and DANIEL ALTMAN
Published: December 21, 2005

SHANGHAI, Dec. 20 - Many economists have long suspected that official  
government statistics here provided only a shadow of reality.

With China’s announcement on Tuesday that its economy was  
considerably bigger than previously estimated, economists and  
financial prognosticators are scrambling to rethink their assessment  
of China’s rise and its role on the world stage. China’s new figures  
suggest that it probably has passed France, Italy and Britain to  
become the world’s fourth-largest economy.

Some economists are even accelerating their timetables for when China  
may eclipse the United States as the world’s biggest economy. With  
the new figures offering a more expansive view of economic activity,  
some said China could overtake the United States as early as 2035, at  
least five years earlier than previous projections.

"We now have a new snapshot of the Chinese economy," said Hong Liang,  
an economist at Goldman Sachs. "This is not slightly bigger - it’s a  
significantly bigger economy."

China said it revised its economic data after a yearlong nationwide  
economic census uncovered about $280 billion in hidden economic  
output last year. The new output was the equivalent of an economy the  
size of Turkey’s or Indonesia’s - or 40 percent the size of India’s  
economy.

As a result, China’s gross domestic product for last year is now  
estimated at nearly $2 trillion, not the previously reported $1.65  
trillion. That translates into an adjusted increase of 17 percent,  
making China the sixth-largest economy in the world in 2004.

With China expected to report another year of sizzling economic  
growth in 2005, its economy may already be ranked No. 4, trailing  
only the United States, Japan and Germany. Moreover, even after two  
decades of very strong growth, China is still the world’s fastest- 
growing major economy, expanding more than 9 percent over the last  
few years.

The United States economy is still far in front, with a value of  
about $11.7 trillion last year. And for all China’s fast growth and  
its rapid ascension to the major leagues among national economies, it  
remains a relatively poor country.

Even with the expected revision, China’s output per person will climb  
to a little more than $1,700 this year. It ranked 134th in income per  
person in 2003, according to the World Bank.

Though its statisticians are highly trained, China is still quite  
secretive about its methods and means for gathering economic data.  
This has long generated debate among economists, much as the Soviet  
Union’s economic figures did: some economists think China’s figures  
disguise weakness, while others think they hide strength.

The figures for China’s national accounts - the numbers that measure  
gross domestic product, including spending and trade - are supplied  
by its National Bureau of Statistics.

The bureau publishes several sets of statistics - some as often as  
monthly - based either on its own estimates or upon numbers supplied  
by China’s local governments. But those figures can vary widely.  
Totting up regional gross domestic product in 2003, for example,  
gives a figure of $1.6 trillion, 12 percent to 15 percent higher than  
the bureau’s own estimates.

The discrepancy also underscores a difference in incentives.  
Provincial and municipal authorities want to impress Beijing and  
limit any embarrassments, as the delays in reporting bird flu cases  
and the chemical spill in Jilin Province have shown.

Beijing worries more about its reputation in the rest of the world,  
where accuracy is paramount.

There are other reasons that huge swathes of the Chinese economy are  
unreported, said Frank Gong, the chief China economist for J. P.  
Morgan Chase.

"The way they collect the G.D.P. is really from supply-side,  
production-based statistics," he said.

Mr. Gong suggested that collecting data from the demand side - what  
consumers actually spend - would be more telling.

In a system left over from when China was almost entirely a planned  
economy, however, all the factories and supermarkets report their own  
sales and spending.

"That’s problematic," he said. "The service part - the cash component  
of the economy - can be omitted easily. That’s why the statistics  
tend to understate the actual level of activity."

Economists say the new figures provide good news for China,  
suggesting that the economy is healthier, more diversified and more  
sustainable than previously believed.

The revised figures, for instance, show that a much stronger services  
sector has emerged in the Chinese economy, taking some weight off  
manufacturing. Dong Tao, an economist at Credit Suisse First Boston,  
said Tuesday in a statement that China might still be underestimating  
the size of its services sector by about $200 billion.

The new figures also relieve some worries that the economy was too  
heavily dependent on investment and could overheat. And they show  
that there are more small and medium-size companies in the country.  
Stephen Green, a senior economist at Standard Chartered Bank, said  
the new figures calm some fears about imbalances in the economy.

"It’s all good," Mr. Green said. "A bigger economy means all the  
dangerous ratios, such as investment as a percentage of G.D.P., all  
fall. And they are usually cited as showing the Chinese economy is in  
danger or headed for a fall."

The new figures are also expected to affect government planners and  
policy makers, altering things like monetary policy and inflation  
forecasts, or how government officials allocate money in the economy.

On a more technical note, Jiemin Guo, a senior economist at the  
United States Bureau of Economic Analysis, pointed out a fundamental  
problem with China’s numbers.

Most wealthy nations use a changing base for their gross domestic  
product series, to allow for differences over time in the basket of  
goods and services that consumers demand: experts don’t want to use  
the price of a 1985 home computer, for example, in calculating  
today’s gross domestic product.

But China uses a fixed base for several years at a time, Mr. Guo  
said, which results in a growing bias. Like the underreporting of the  
service sector, this issue is especially serious, because it could  
affect the accuracy not just of the gross domestic product but also  
of its growth rate over time.

The statistics bureau has acknowledged several of these problems and,  
unlike the old Soviet scorekeepers, it is eager to improve the  
quality of its statistics.

The bureau is working with the World Bank to develop a plan for its  
statistical apparatus, which would include reconciling the national  
and local figures.

Ms. Hong at Goldman Sachs offered an analogy to explain why the new  
figures were important.

"Does China have some structural illness or cancer, or is there an  
error with the X-ray?" she asked rhetorically.

"The last few years, so many famous economists cited the very high  
investment-to-G.D.P. ratio as a serious problem. Now it looks like  
the X-ray machine had a problem, not the patient."

David Barboza reported from Shanghai for this article, and Daniel  
Altman from Hong Kong.

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