China to be world's 4th biggest economy after GDP revision

China to be world's 4th biggest economy after GDP revision
http://www.forbes.com/business/feeds...fx2393646.html

BEIJING (AFX) - China will leapfrog Italy, France, and Britain to be officially recognized as the world's fourth-biggest economy if it revises its 2004 gross domestic product up by 300 bln usd on Dec 20 as expected, Standard Chartered economist Stephen Green said.

In a research note, Green said the additional output will also drastically improve measures of the the Asian powerhouse's economic health.

'As if China's economy was not growing fast enough, thanks to a statistical revision, growth in 2005 looks like being about 30 pct,' Green said.

'The recent national economic survey has apparently found another 2.4 trln yuan worth of output,' Green said.

He said the new-found figure is equivalent to 17.5 pct of last year's GDP.

'That is equivalent to finding Indonesia or Turkey hidden in the Xinjiang deserts. This is not an insubstantial event,' Green said.

But he added that this revision does not directly translate into 30 pct growth for this year as it will have to be spread out over the last few years.

'(This means) China's economy will likely have grown faster than 9.5 pct in recent years... as if we didn't know that already,' Green said.

He said the major upward revision in output also has implications for the understanding of China's economy.

'First, China rises rapidly up the table in the world rankings of economies, from a previous seventh place in 2004 to fourth today. It leaps over Italy instantly with the 2004 revision, and France with GDP growth in 2005,' he said.

'With the eight pct fall of Britain's currency relative to the US dollar (and thus the yuan) this year, China will be bigger than the UK economy in US dollar terms too,' Green said in the note.

He said output in China is now equivalent to 18 pct of the US economy, and roughly 45 pct of Japan.

'It also brings us several years closer to the day when China's GDP overtakes that of Japan and the US,' he said.

But Green said that far more important than these league table effects is something more tangible -- China's people just got richer.

'Per capita GDP rises from 10,561 yuan in 2004 previously to 14,079 in 2005,' he said.

Green said in the note that it remains to be seen exactly from where the new output is coming, as one of the perennial puzzles for economists is explaining the relatively low level of service sector contribution to China's economy.

'Back in 2003, according to the old figures, 52 pct of GDP came from industry, and only 33 pct from services. But assuming all the new activity is in services (and that is a big assumption), then we will have an economy which is 41 pct services. This makes China a more normal low-income economy -- services usually make up about 50 pct of GDP in such economies, compared to about 60 pct in upper-middle income economies,' Green said.

But he said China is still an 'outlier' -- thanks to banks (and officials) preference for industrial development, rather than funding the service sector.

'We think most of the extra output is in services since the statistical apparatus is not that good at measuring the sector. The change will also affect our understanding of investment. It is still growing fast, but the economy should become a little less dependent upon it,' he said.

He said that at present, gross fixed capital formation will be about 46 pct of GDP in 2005.

If all the new output is in non-investment activities, then this ratio will drop to about 38 pct. He said this is a much more reasonable figure, closer to the norm of Hong Kong, Singapore, Japan and South Korea during their fast growth phases, the note said.

'Those who worry about China's investment ratio being too high will be reassured. Those who think the banks are still not good at assessing loan applications will remain worried by all the investment activity out there ... and we put ourselves in the later camp,' Green said.

He said that the newly bolstered GDP will mean China's external debt will be nearer 10 pct by the end of this year from 13.8 pct at end-2004

With non-performing loans officially at 1.28 trln yuan as of end-September 2005, the NPL/GDP ratio at year-end 2005 should fall from around 8.25 pct to 7 pct, he said.

'The IMF was looking for domestic debt at year-end 2005 to be worth 19.6 pct of GDP. That can now be revised down to about 16 pct,' Green said.

He said the budget deficit also falls with the massive GDP revision, and all these are positive for the solvency of the banking sector, as well as for the government's books.

'Of course, tax revenues as a proportion of GDP fall too -- from 20 pct in 2004. But strong tax collection this year means we are not worried about that. Even before this revision, the debt profile looked sustainable, even including the government's implicit liabilities,' Green said.

He said much more will be known in the following weeks on the breakdown of the new output, and more insight into how the government collects and compiles its economic data.

'We are just scratching the surface here. In the following weeks we will ... understand more of the ramifications. But all in all, this is good news for China. It just got a lot bigger,' he said.

 

China is popularly thought to have a large economy, but those advancing this idea generally use the measurement of Purchasing Power Parity, which paints a far rosier picture than reality. The country’s economy is far smaller on the traditional measurement using exchange rates to determine relative GDP’s, and the picture is stark when you look at the per capita statistics.

How many Boeing B777’s can you buy with Purchasing Power Parity? Or how many triple bypasses, educations for your kids at Oxford or Ole Miss, or trips to Vegas to see Wayne Newton and Celine Dion? None, of course. Purchasing Power Parity, PPP, is among other things, a way to let poor countries feel better about themselves.

Back in the Pleistocene Epoch, when your correspondent was coming up, countries were compared in terms of GNP or GDP, the total output of the economy measured at the exchange rates of the countries’ currencies. Things are a lot fancier today. Today, PPP is often used as a proxy for the size and power of an economy. PPP doesn’t use exchange rates; it take a “basket of goods” and costs them out in each country. You can see how this distorts and inflates the size of an economy if the basket of goods were bowls of rice and clean shirts. A country with lots of rice and nickel an hour washerwomen would look mighty large compared to the US.

for example, a few months ago, a column by Helprin in which he waxes concerned about the emerging power of China’s $6.5 trillion PPP economy. No doubt about it, as we have noted several times, China is an emergent economic power. A $6.5 trillion economy sounds pretty big compared to the US’s $13 trillion economy. And it’s not just Helprin. The CIA Factbook, often nicely politically correct, also uses the $6.5 trillion figure.

But China’s economy is really a lot smaller than these numbers suggest. Measured in the traditional way, China’s GDP is maybe $1.8 trillion today (State Dept. estimate). Further, the economic hypergrowth in China is extremely concentrated. For example, according to the Peoples’ Daily, GDP per capita in Shandong Province (#2 in growth) is $2000, while, based on Economist data, GDP per capita in rural provinces may be 10-20% of this (and the Northeast is depressed). Hence, the Chinese economy is pretty small still — 35% of Japan, for example, with 7x the people — and seriously unbalanced.

Moreover, the banking system is a mess, wherein irrational loans to government companies or favored industries go bad, but are bailed out by the country’s huge forex reserves (over $600 billion(!!) today); Economist, on last year’s bank crisis, soon to be followed by this year’s bank crisi

This latest scheme undoubtedly looks neat. By pumping $45 billion of its massive $400 billion of accumulated foreign-exchange reserves into the banks, China seems to be making effective use of a ready pool of funds, currently parked in relatively low-yielding assets. Yet repeated capital injections, even clever ones, are not themselves a genuine solution to China’s banking problems. Since 1998, China has spent roughly $200 billion in recapitalising its banks and writing off bad loans, to little avail. Politically directed lending to favoured industries has continued as before, and the old, written-off bad loans were soon replaced by new ones. Today, some independent estimates put the level of bad loans at around $420 billion, or nearly 40% of gross domestic product.

 

take a look at this article.

The per capita statistics:

This today from the Peoples’ Daily:

Statistics from the United Nations Development Program show that China’s Gini Coefficient is 0.45 and the income or consumption of the poorest, who take up 20 percent of the gross population, accounts for only 4.7 percent of the total, while the share by the 20-percent richest is as high as 50 percent.

Let’s take a look at what these statistics mean when we boil them down. Assuming 1.4 billion people in China, 20% of the population is about 280 million people, which, conveniently for comparison, is about the size of the USA. The report says that 50% of GDP is concentrated in this 20% of the population. If we assume China’s 2005 GDP is about $1.8 trillion, as opposed to $13 trillion or so for the USA, you see that the richest 20% of China have per capita GDP of — shockingly — $3,214.28 per year, as opposed to about $40,000 on average for the United States. Let’s repeat this again: the average American makes 12 times more than the richest Chinese.

For the record, we’ll do the calculation for the poorest 20% or 280 million Chinese people. Their slice of the GDP is about $85 billion, which translates to a pathetic $302.14 annual income per head. Here is where Purchasing Power Parity plays perhaps a useful role, for while these country people can’t buy a Lexus or even a Yugo, the basic staples of life are quite cheap, so their life situation is better than the numbers portray. Still, they are dirt poor.

the point in performing these calculations is not to mock or belittle the accomplishments of the Chinese people, who have worked hard and smart to get a lot more prosperous than they were under a Marxist economic system. It is rather to emphasize just how limited a group has middle class incomes in the export-led growth of China. A meaningful blip in China’s growth will, in our view, likely have a disproportionate impact on the consumption patterns of those made newly prosperous by the explosion in China’s exports

 

BTW, do the figures GDP/GNP really mean everything??

Take a look at the army, technology, no of Nobel price winners, education system, etc of US.... these are all intagible and are the fundamental drivers of economic growth.

Not to mention the political system too.

I am a Chinese. I can tell you that I hv NEVER met anyone sane who really thinks that China can surpass US as a global superpower.

 

General Chinese people simply ignore the revision of GDP, because they believe that somebody's mind must be damaged to accept any statistical data from the Chinese government. It is a country that if you want to be more successful, you have to do more cheating.

 

The official amended GDP number was published yesterday. I/O 4th, China declared it to be the 6th biggest economy for the year 2004.


Maybe it will be the 4th biggest in 2005.

 

You cannot rely on the efficacy of any figures from the Chinese Commies.

 

Do you mean:

???

 

domi93 - Great posts, thanks. You make great points about PPP, etc.

It's interesting that, while everyone agrees the Chinese have worked hard and are coming on strong, there's very little thought given in the many analyses to the weaknesses in or threats to the Chinese economy and political system. It reminds me a bit of the ranting and raving about Japan in the '80's when they were supposedly taking over the entire world economically.

Even the best economies and countries have problems. Why would China be any different?

 

?

I think what he said is quite clear.