This page has been archived and commenting is disabled.

China Prepares To "Boost" Economy By Also Revising Its GDP Definition

Tyler Durden's picture




 

Now that even that bedrock of the Keynesian voodoo religion, the Gross Domestic Product calculation, has become a ridiculous farce, with everyone in Europe suddenly adding the uncalculable "contribution" from drug dealers and hookers all in a mad dash to make debt/GDP ratios appear better than they are, it is truly time to unleash the clowns as none other than the country which has taken fabricating economic data to an artform, no not the US for those confused but China, is preparing to change the way its calculates its GDP, with the biggest contribution coming from, hold on to your hats, R&D. One wonders if "reverse engineering" of pirated products and services is covered in this "non-GAAP GDP" category. The end result? GDP for the country which cumulatively will be several percentage points higher once the entire fudging/recasting exercise is completed.

Here are the details from Bank of America's Sylvia Sheng

Proposed changes in China’s GDP

According to reports by 21st Century Business Herald, the NBS has recently completed a preliminary draft of a new GDP accounting methodology. This draft will be submitted to the State Council for approval later this year and is expected to be implemented in 2015. Back in November 2013, a Deputy Head of the NBS, Mr. Xu Xianchun told the official Xinhua News Agency that adjustments are being made to the 2002 China National Account System. Mr Xu said that the revised historical GDP data will be released after the third national economic census.

Moving to the 2008 SNA

China’s proposed revision to GDP accounting approach mainly reflects the updated international guidelines for national economic account in the 2008 UN System of National Accounts (SNA). A number of countries such as the US, Australia, Canada and Korea have already implemented the changes. In particular, the NBS is planning to make the following changes:

  • Recognition of R&D as gross fixed capital formation in GDP: under the current system, R&D expenditure is considered as “intermediate consumption” and not included in the calculation of final GDP. A number of surveys have been conducted on R&D activities carried out by the government, research institutions and companies. These surveys provide a good basis for including R&D expenditure in GDP calculations.
  • Adopt a rent-based approach to estimate the services provided by owner-occupied housing: Currently, NBS uses a cost-based method to calculate the imputed rent of owner-occupied housing by adding depreciation of housing capital to maintenance and management costs. This method was established at the 2004 census when the rental market was not fully developed and data on rents were scarce. However, with recent development in the property market and rapid increase in both property price and rental price, the NBS plans to estimate the value of services of owneroccupied housing using data in the rental market.
  • Adopt actual final consumption of households: The NBS currently measures household consumption using household final consumption expenditure. The main difference between household final consumption expenditure and actual final consumption of households is that the latter takes into account goods and services provided by the general government such as education and health services.
  • Recognition of income resulting from the transfer of land contract and management rights: This change reflects the guidance given in the 2008 SNA to distinguish between legal ownership and economic ownership. According to China’s constitution, land in rural areas is collectively owned. However, based on the principle of economic ownership, farmers who obtained the contract and management rights are the economic owners of the land. Therefore, income received by the farmers from transferring the contract and management right to other individuals and/or institutions constitute households income. This will account for a significant proportion of some farmer’s income.
  • Include stock options as employee compensation

Recognizing research and development

The NBS is planning to reclassify R&D as gross fixed capital formation rather than its current treatment as “intermediate consumption”. According to the NBS, expenditure on R&D was RMB1.2tn in 2013, and its share of GDP has grown steadily from 1.1% in 2003 to 2.0% in 2013 (Chart 1). Therefore, recognizing R&D as GFCF will boost the level and growth rate of nominal GDP.

However, it is not clear whether all of the R&D expenditure as reported by the NBS will be counted as GFCF. This is because the R&D expenditure could include spending on used equipment which should not be included in GDP as it is not produced in the current period. Moreover, some of the R&D conducted by government funded research institutions may have already been included in the GDP in items such as government spending.

For 2013, we estimate a 2% increase in the nominal GDP level and 0.1pp rise in nominal GDP growth assuming all of the R&D expenditure will be included in the GDP. By linearly extrapolating the growth rate in the R&D expenditure, we estimate that including all R&D expenditure will add 2.1% to nominal GDP level and less than 0.1pp to nominal GDP growth in 2014. The actual impact on nominal GDP level and growth could be even smaller due to reasons mentioned above. Thus, the impact of including R&D as GFCF on real GDP growth could be minimal once we take into account of inflation.

Looking at the experience of other countries that have included R&D expenditure, our US economics team estimated that the addition to real GDP growth from R&D is between 0-0.1pp during 2002-2007 when US R&D expenditure accounted for around 2.6% of GDP. In Korea, real GDP growth in 2013 was revised up by 0.2pp after the country adopted the 2008 SNA. R&D expenditure accounted for around 4.3% of GDP in 2013. So our estimates of the impact of including R&D expenditure on China’s real GDP growth is roughly in line with the data from other countries given China’ R&D expenditure’s share of GDP is relatively lower.

Adopting rent-based approach for owner-occupied housing

Services provided by owner-occupied housing are currently calculated using a cost-based approach by adding depreciation of housing capital to maintenance and management costs. In particular, the depreciation of housing capital is calculated based on construction cost of the property and the depreciation rate.

However, with the rapid increase in the property and rental prices in recent years, adopting a rent-based approach is likely to increase the value of services provided by owner-occupied housing, which will lead to a boost households’ consumption expenditure. Moreover, this change is probably more relevant for urban households than rural households as there is no active rental market in rural areas.

According to the latest available data published by the NBS, consumption expenditure by urban households on residence related services was at RMB2.2tn in 2011, account for 4.6% of GDP (Chart 2). Consumption expenditure on residence related services here includes spending on utilities, property management fees, rental expense and imputed rental value of owner-occupied housing. According to the 2010 Census, home ownership in cities and towns are around 79%. Therefore, imputed rental value of owner-occupied housing is likely to account for a significant proportion of the consumption expenditure on residence related services. However, it is difficult to estimate the increase in the nominal GDP level from the adoption of rent-based approach because we don’t know what rental data will be used. Moreover, residence related consumption expenditure has been growing at a double-digit pace in recent years, so the impact on nominal GDP growth from changing to rent-based approach could be rather limited.

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Tue, 07/08/2014 - 09:05 | 4934952 LawsofPhysics
LawsofPhysics's picture

No one understands mark to fantasy better than the Chinese.  It's been this way for a very long time folks.

Tue, 07/08/2014 - 09:07 | 4934958 Silver Shield
Silver Shield's picture

The anti hegemon rises.
http://youtu.be/hzW1c640yO4

Tue, 07/08/2014 - 09:18 | 4934974 LawsofPhysics
LawsofPhysics's picture

That which cannot be sustained, won't be, regardless of who is involved.  The "BRICs" won't amount to shit. It's a global ponzi now.

People define their borders, not the other way around.  In short, borders will be re-drawn.  The change will come from the components of former nation-states.  History is very clear on this.  Also remember, Rome was actually destroyed from within.

Tue, 07/08/2014 - 09:46 | 4935060 lordylord
lordylord's picture

Government: an organization of people who can freely participate in theft, murder, and fraud...until the guillotines get rolled out. 

Tue, 07/08/2014 - 09:54 | 4935089 Stackers
Stackers's picture

The US also applies "owner rent" to GDP. Let's say you own your house outright. The government figures what you "should" have paid yourself in rent to live in the house you own, and then adds that amount to GDP. I think this "adjustment" alone adds over $1 trillion to US GDP.

Tue, 07/08/2014 - 12:02 | 4935574 caShOnlY
caShOnlY's picture

I think this "adjustment" alone adds over $1 trillion to US GDP.

1.6 TRILLION as of November 2008.  Probably 2.6 Trillion now.  When a nation backed by FIAT resorts to hedonics in its accounting, you'd best be stacking up on REAL MONEY.

Tue, 07/08/2014 - 09:19 | 4934981 knukles
knukles's picture

The numbers out of China have never ever been anything other than guesses fabricated from suspicions and readings by elderly valued seers, collated by disentangled uncommunicative abacuses, estimated by nobody in particular moseying through the endless open markets whilst haggling for fresh swallow penis soup and lamprey testicles, based upon a head count of diseased pigs and chickens dreamt by small slave children who work in the Ministry of Sophistry eating of the best of stale Bazooka bubblegum wrappers served as dessert at Foxconn.

And this will lend a bit of credibility to the data?

http://www.telegraph.co.uk/culture/culturepicturegalleries/10879040/In-p...

I think I'll just ignore "reality" today.

Tue, 07/08/2014 - 09:24 | 4935004 Dr. Engali
Dr. Engali's picture

Whoa..... I thought you were talking about the U.S for a minute there until you used the word 'valued'. 

Tue, 07/08/2014 - 10:25 | 4935197 Eastwood
Eastwood's picture

Don't be surprised if the computers of any who posts on this article will freeze, shut-down, become virally infected, spotaneously combust.  On the plus side you will be adding .00000000001 percentage points to their GDP for triggering the hostile response.

Tue, 07/08/2014 - 09:07 | 4934957 youngman
youngman's picture

That must cover the millions of their computer hackers trying to get into our computers to steal our goodies....thats a big part of theri GDP

Tue, 07/08/2014 - 09:24 | 4935002 knukles
knukles's picture

Can you imagine all the porn they' d find!
Wired magazine estimated that 60% of all Internet traffic is porn.
Meaning that those servers in Utah hold the BEST collection of demented disgusting and degrading porn on earth.
Thereby furthering the "War on Women"  Gays, lesbians, children, animals, trannies, midgets, etc., etc., etc
That alone is ground for a cease and desist order.

Bet they let the SEC enforcement division employees watch for free.
Saves premium subscription costs

Dr Strangelove; "Ve has a data fabrication gap!"

Tue, 07/08/2014 - 09:36 | 4935028 CheapBastard
CheapBastard's picture

These Gubmints are so helpful. I just revised my equation for my income using the “Cheap Bastard Inflator/Booster Constant” and doubled my cash flow on my balance sheet so when I meet with the bankers next week they will be very impressed.

 

I am learning.

Tue, 07/08/2014 - 09:30 | 4935017 Sudden Debt
Sudden Debt's picture

I'm confused... Are your Chinese or are you American?

Tue, 07/08/2014 - 09:11 | 4934969 Sudden Debt
Sudden Debt's picture

It's just the game of "the greater fool"

 

Tue, 07/08/2014 - 09:12 | 4934970 kchrisc
kchrisc's picture

If governments published GDP numbers in book form, would the book be shelved in the fiction or humor sections?!

 

"A priest, a little-boy and a GDP walk into a bar..."

Tue, 07/08/2014 - 09:19 | 4934983 headhunt
headhunt's picture

I suggest a new section called 'Government Fantasy' and the best part it doesn't even have to make a profit to go into multiple printings.

Tue, 07/08/2014 - 09:29 | 4935016 Headbanger
Headbanger's picture

And have right next door to The Ministry of Silly Walks which actually does something a lot more useful.

Tue, 07/08/2014 - 09:13 | 4934972 JustObserving
JustObserving's picture

So how many trillion will the Chinese add to their GDP?  Here is Paul Craig Roberts today about the fraud that is the US economy:

Stock market participants might be in for a second quarter surprise. The result of many years of changes made to the official inflation measures is a substantially understated inflation rate. John Williams (www.shadowstats.com) provides inflation estimates based on previous official methodology when the Consumer Price Index still represented the cost of a constant standard of living. The 1.26% inflation measure used to deflate first quarter nominal GDP is unrealistic, as Americans who make purchases are aware.

A reasonable correction to the understated deflator gives a much higher first quarter contraction. The two main causes of inflation’s understatement are the substitution principle introduced during the Clinton regime and the hedonic adjustments ongoing since the 1980s that redefine price rises as quality improvements. Correcting for excessive hedonic adjustments gives a first quarter real GDP contraction of 5%. Correcting for hedonic and substitution adjustments gives a first quarter real GDP contraction of 8.5%.

Realistic economic analysis is a rarity. The financial press echoes Wall Street, and Wall Street economists are paid to help sell financial instruments. Gloomy analysis is frowned upon. Even negative quarters are given a positive spin.

Years of understatement of inflation has resulted in years of overstatement of GDP growth. Thinking about the many years of misstatement, we realized that the typical computation in nominal terms of the ratio of debt to GDP is seriously misleading.

http://www.paulcraigroberts.org/2014/07/08/deteriorating-economic-outloo...

Tue, 07/08/2014 - 09:16 | 4934978 Dr. Engali
Dr. Engali's picture

Can we stop pretending any of this is real? Just tell us what the GDP number will be regardless of reality  as well as the BernankenYellenStein's year end target for the Standard and Poorsky and it will all be good.

Tue, 07/08/2014 - 09:19 | 4934986 world_debt_slave
world_debt_slave's picture

animal spirits know no bounds

Tue, 07/08/2014 - 09:19 | 4934988 RiskyBidness
RiskyBidness's picture

It is pretty sad that the world is competing on who the biggest sham is.  We at zero hedge are laughing, but most of the public is not competent enough

to even understand......let alone care.  This is just admitting that they cannot even win while cheating.  

Tue, 07/08/2014 - 09:24 | 4935003 Eyeroller
Eyeroller's picture

Window dressing only works for so long.

Tue, 07/08/2014 - 09:25 | 4935011 Peter Pan
Peter Pan's picture

Wait till the US starts to incorporate surveillance activities into its GDP.

 

Tue, 07/08/2014 - 09:28 | 4935013 headhunt
headhunt's picture

This is one of the many reasons when the sky starts to fall the dollar will still remain king.

The dollars sucks but people will still have more faith in the dollar and 'faith' is all paper is based on.

No one wants to be holding Rubles or Yuan when the music stops.

Tue, 07/08/2014 - 09:33 | 4935022 Headbanger
Headbanger's picture

Don't be so sure.

At this point the only thing keeping the U.S. dollar standing is U.S. military might.

But that might costs a lot of money which must be borrowed from foreign nations who could stop funding our military now that they're seeing what a greedy, corrupt, dysfunctional nation the U.S. has become.

Because Obama.

Tue, 07/08/2014 - 10:10 | 4935151 headhunt
headhunt's picture

'...greedy, corrupt, dysfunctional nation the U.S. has become. Because Obama.'

So true but one of our greatest strengths is we can turn this tub of lard and feces in any election.

If you really believe otherwise take the Yuan and Ruble long positions - early retirement.

Tue, 07/08/2014 - 09:29 | 4935015 JustObserving
JustObserving's picture

Can we include CIA drug trafficking and counterfeiting in US GDP?

The American secret service, the CIA, could be responsible for manufacturing the nearly-perfect counterfeit 50 and 100-dollar-notes that Washington pins on the terror regime of North Korea. The charge comes after an extensive investigation in Europe and Asia by the Sunday edition of the Frankfurter Allgemeinen Sonntagszeitung of Frankfurt, and after interviews with counterfeit money experts and leading representatives of the high-security publishing industry.

http://www.watchingamerica.com/frankfurterallgemeine000008.shtml

Tue, 07/08/2014 - 10:05 | 4935023 ThisIsBob
ThisIsBob's picture

Hookers and blow will cure any economy.

Tue, 07/08/2014 - 10:18 | 4935176 headhunt
headhunt's picture

Mexico and D.C. are good examples of that.

Tue, 07/08/2014 - 09:42 | 4935043 kchrisc
kchrisc's picture

Don't worry, Winston Smith will fix it.

Tue, 07/08/2014 - 09:42 | 4935044 RagnarDanneskjold
RagnarDanneskjold's picture
Signs Point to Lower Yuan, But US Treasury Wants Appreciation

USA: Treasury Secretary Jacob Lew expressed concern over China’s foreign-exchange intervention...U.S. wants to send “an early warning shot” at China in order to put a floor under depreciation. 

China: The increase and decrease in the central bank's forex assets, which mainly reflect its foreign exchange purchases and sales on the yuan market, clearly show that the monetary authorities have recently sharply reduced their intervention.

Tue, 07/08/2014 - 09:44 | 4935051 papaswamp
papaswamp's picture

Nicaragua and Hong Kong ( China) cut a very interesting deal on a new canal ( wider and deeper than Panama canal) to connect pacific and Atlantic.

http://bbc.in/1n3KBGK

Tue, 07/08/2014 - 09:59 | 4935114 orangegeek
orangegeek's picture

fucking communists

Tue, 07/08/2014 - 10:46 | 4935265 22winmag
22winmag's picture

GDP... the all-time heavyweight champion of bullshit statictics.

Tue, 07/08/2014 - 10:51 | 4935282 Bahamas
Tue, 07/08/2014 - 11:30 | 4935446 jerry_theking_lawler
jerry_theking_lawler's picture

I.Love.Goalseek.

or should it be #ilovegoalseek

whatever.

Tue, 07/08/2014 - 12:05 | 4935586 eishund
eishund's picture

Crap. U stole my line!

I got another: I love Gold Seek.

Tue, 07/08/2014 - 14:47 | 4936329 JenkinsLane
JenkinsLane's picture

I think there should be a new tag for ZH articles - "You can't make this shit up".

Do NOT follow this link or you will be banned from the site!