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China Will Revise Its GDP Definition Until Its Hits Government "Growth Targets", Goldman Explains
Previously we have commented that when all it takes for a country to "hit" its GDP target, is to adjust said definition by adding the benefit of estimated ancillary items as prostitution and drugs, GDP loses all relevancy and meaning in its transformation to an arbitrary, goalseeked policy measurement and validation tool straight out of China's Department of Truth. After all how else would the Spanish political kleptocracy boast the "favorable" impact of its disastrous policies if it wasn't for a slew of recent definitional revisions. And yet, all throughout our commentary we were doing so tongue-in-cheek: after all, it is taboo for the very serious economists to discuss the hilarious systemic failures that allow their most prized indicator of "growth" to become a mockery of fringe tinfoil blogs.
At least, it was taboo until now, because moments ago, in an example of "very serious phrasing", none other than the bank that does god's work on earth (especially when it means providing off balance sheet financing for the bank of the Holy Spirit), just reported that the reason why China will hit its growth target is because of, drumroll, its fudged GDP. Only Goldman is far more serious when it says all of this, with the result being just too hilarious for words: to wit: "In the coming months, China’s National Bureau of Statistics is to make adjustments to the methodology used to calculate GDP. These adjustments are likely to boost real GDP growth by 0.1-0.2pp, thereby making it easier for the government to reach its goal of “around 7.5%” GDP growth in 2014."
But wait there's more, because the biggest adjusted "contributor" to China's economy will be the retroactive benefit from R&D that previously was treated as a cost rather than an "investment." Yup: research and development, which in China has a different name: Piracy and Reverse Engineering, only R&D is sexier than P&RE.
Which brings us to the question of the day: have we finally gone full econotard? Or is changing the rules to hit your target, while fabricating the dumbest possible adjustments, now considered very serious economic policy?
Full note from Goldman Sachs, whose humor value is far higher than the author intended:
China’s statistical adjustments are likely to make it easier to reach the GDP growth target
The coming months will see two changes to China's economic statistics. First, the government is to adopt the latest version of the international national accounting standard: the System of National Accounts 2008 (SNA 2008). The treatment of R&D as investment instead of a cost is likely to be most important effect of this change. Second, the government has just conducted a census, undertaking a comprehensive measurement of the economy rather than the partial surveys that are normally carried out. In the past, this has led to significant revisions to historical data in terms of both the size and growth rate of the economy.
The SNA 2008 adjustment will likely lift 2014 GDP growth by 0.1-0.2pp
Under the previous SNA 1993 standard, the investment category in GDP accounting mostly captured tangible investment, such as machinery. The new SNA 2008 standard recognises the pitfalls of such a narrow definition of investment, which does not include the contribution to growth from R&D or other fixed investment.
The US and Singapore are among the countries that have adopted this practice in recent years (although the US technically uses its own NIPA rather than the more commonly used SNA), and the impact on their GDP data has been significant. Korea is about to adopt the same standard.
The effects on China’s GDP growth rate of adopting the SNA 2008 is likely to be at least as significant, given that China's R&D expenditure growth has been particularly fast (Exhibit 1).
The rapid growth in R&D likely reflects the government's strong focus in this area, and may explain why China's GDP growth rate accelerated strongly in 2009 even as growth rates in most other economies suffered significantly. Private investment has also contributed, as the private sector has been able to take advantage of the large and relatively cheap talent pool in science and engineering. But private investment probably still plays a secondary role, especially given that the protection of intellectual property rights (IPR) has only just started to improve.
Those sceptical of China's economic model may question the impact of increased R&D expenditure, since investment expenditure does not necessarily form capital if it is not used efficiently. However, the same could be said about other fixed investment expenditure, and we have seen no evidence that China’s R&D expenditure is spent less efficiently than other fixed investment (although this does not imply that the level of efficiency itself is high or low). Indeed, the number of patents has increased rapidly in recent years, which we view as a reasonable way to judge the impact of R&D in China (Exhibit 3).
Exhibit 2: ... and has led to a significant improvement in China's ranking in global publications …
Source: Nature Publishing Index, OECD, China national bureau of statistics, US national science foundation
Exhibit 3: ... and in patent filing
Source: OECD, China national bureau of statistics, US national science foundation
Estimating the potential impact of the move to SNA 2008 is tricky given the lack of information:
- There is a lack of technical detail on the methodology of the revision. The only details we are aware of appeared in an interview of NBS deputy chief Xu Xianchun by Xinhua News Agency, targeted at a general audience.
- There is a lack of detailed and up-to-date data. Investment in humanities and social sciences is typically excluded (to the dismay of economists). Without such data, we are only able to use the aggregate R&D figure or exclude 'basic research' to estimate the impact of the forthcoming statistical change (basic research accounts for just 5% of total R&D expenditure and its growth has been similar to overall research, which means that the impact is minimal). With almost three-quarters of the year gone, there is no information at all on whether this year’s growth rate has been like last year's (around 14%), nearer the average growth rate for the past decade (around 20%), or if it has reached the peak level (the mid-20s) of 2004 and 2009.
- Deflating the nominal series is difficult, as R&D expenditure should be deflated as a component in the various industries. Deflating at the aggregate level is less precise. That said, the problem has been less pronounced in recent years as inflation has been stable and the GDP deflator and CPI have been similar (in 2013, for example, the GDP deflator was 1.8% and CPI was 2.6%. The difference is small historically and small in light of the 15%+ nominal R&D growth rate).
If this year’s R&D growth is similar to last year’s, which was the lowest in the past decade, GDP would be less than 0.1pp higher (slightly more than 2% of additional GDP growth of around 14%yoy). If the growth rate is the same as the average rate over the past 5 or 10 years (18% and 20%) the impact would be around 0.2pp larger. If we use peak growth rates (24% and 26% in 2004 and 2009), the impact would be around 0.3pp. We think the first two scenarios are more likely than the third, given the recent downward trend.
There are other SNA 2008 changes, but these are unlikely to have a significant impact on the size and growth rates of the economy.
* * *
In other words, there is no data about the primary fudge factor, but it will surely boost GDP, which is why you can put your fears about a Chinese hard, or soft or any landing on the backburner. Because suddenly and mysteriously the economy will have been growing faster than previously calculated.
Q.E.D.
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Doo you guise really like Tyler Durden?????
We like anybody with economic morality OCD.
The beatings will continue until moral improves
Pretty sure that's " head-choppings" will continue until morale improves.
But I like your point.
"Lies, damned lies, and Goldman Sachs statistics"
The US has been revising its GDP definition for decades. Why can't China?
Chinese Rating Agency Dagong: America's Economy Is Actually Less Than Half The Size It Claims To BeThe total output value of the U.S. financial services industry is composed of two major parts: one is the transferred production value, most of which comes from value distribution of participating in international production. Another part is the inflated value originated from credit innovation, which belongs to bubble value. In addition, due to the high economic financialization, more than half of the profits in the real economy come from the returns of financial activities. If we exclude the factor of virtual economy, the U.S. actual GDP is about 5 trillion U.S. dollars in 2009, per capita GDP about $ 15,000. Meanwhile, the total domestic consumption was 10.0 trillion U.S. dollars and government expenditure was 4.5 trillion U.S. dollars.
http://www.businessinsider.com/china-dagong-us-gdp-2010-11
US GDP Will Be Revised Higher By $500 Billion Following Addition Of "Intangibles" To Economy
http://www.zerohedge.com/news/2013-04-21/us-gdp-will-be-revised-higher-5...John Williams over @ shadowstats would probably agree, if he was living abroad.
Hookers and beer! Bring it on chings!
The term 'adjustment' never means minor tinkering to any seasoned kleptocrat....and, btw, the only R&D spending China does is on the theft of intellectual property created by others.
As Confuseus say..., why waste time thinking up things already thought up?
Yeah but they don't spend any near as much Time on spacebook, Twater and instagroin! That raises our GDP by light years
Reminds me of a joke that goes something like this:
A mathematician, an accountant and an economist apply for the same job.
The interviewer calls in the mathematician and asks "What do two plus two equal?" The mathemetician replies "Four." The interviewer asks "Four, exactly?" The mathematician looks at the interviewer incredulously and says "Yes, four, exactly."
Then the interviewer calls in the accountant and asks the same question "What do two plus two equal?" The accountant says "On average, four - give or take ten percent, but on average, four."
Then the interviewer calls in the economist and poses the same question "What do two plus two equal?" The economist gets up, locks the door, closes the shade, sits down next to the interviewer and says "What do you want it to equal?"
There is more major revisions: China revises law to better manage government money
Revised Budget Law to have far-reaching effect It's dubbed the "Economic Constitution"
If you can't change the rules, what's the point of owning the game?
In China, R & D stands for Receive and Duplicate..
Why spend money that will only increase the cost of the widget when you can let others do that work.
I always thought it meant Reverse Engineer & Duplicate.
time fo a corrapse
Not any different than the US policy concerning GDP, Inflation, Unemployment numbers etc... To make it out as this is a unique and sinister practice only used by the Chinese is about as intellectually dishonest as it gets.
I'm sure this has nothing to do with Israel. Gold. Or the West being anti Asia
Well, at least they tell us they're going to lie to everyone. Here in the US it's a big poorly kept secret.
Redefining terms to meet the goal seems to be a trend with most countries lately
Change the meaning to maintain the illusion
It is happening so often now that the slow motion wheels coming off the illusionary bus are approaching light speed
Here was an oldie but a goodie. If they redefined it well enough they could have cured Jamie Dimon without treatment
http://www.forbes.com/sites/paulhsieh/2013/09/29/why-the-federal-governm...
Theres nothing that can stop a complete meltdown now, because all parties involved have seen their death, and are deperate to prolong the inevitable.
First remove the beam out of your own eye
God's work my ass M'Fers.
Pretty soon they will be measuring, then adding in, the 'value' of cow farts. I shit you not.....pun intended. :-0
Sounds like they took this from the play book of Amerika. Too bad we only export bull shit these days.....
So China has copied yet another thing from Amerika.
Next they will take a page from Italy's book...
http://freakonomics.com/2014/06/10/italy-to-include-prostitution-and-ill...