China s gross domestic product estimation

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1 China Economic Review 15 (2004) China s gross domestic product estimation Xianchun XU* Department of National Accounts, National Bureau of Statistics of China, 75 Yuetan Nanjie, Xichengqu, Beijing , China Accepted 4 September 2003 Abstract This paper describes the process of establishing and improving Chinese gross domestic product (GDP), estimation data information and dissemination procedure, main data sources, and calculation methods and presents the main supplementations and adjustments to the historical data. The paper also analyzes recent reforms adopted by the National Bureau of Statistics (NBS), discusses some of the remaining problems, and offers a personal view and ideas for further reform of Chinese GDP estimation. D 2003 Elsevier Inc. All rights reserved. Keywords: GDP; Calculation methods; Reform measures 1. Establishment and development of China s gross domestic product (GDP) estimation 1.1. Establishment of China s GDP estimation National income, the key indicator in the Material Product System (MPS) by the Soviet Union and East European countries has been long adopted in China, from its founding to the early stage of its reform and opening up to the outside world. This statistic played a key role in reflecting the activities of material production industries, that is, agriculture, forestry, husbandry and fishing; mining and quarrying, manufacturing, electricity, gas, and water; construction; wholesale, retail trade, and catering; and transport, post and telecommunications for the planned Chinese economy. However, it was unable to reflect the activities of nonmaterial services industries. Since China s reform and opening up, nonmaterial service industries such as banking and insurance, education, science and research, and consulting have developed rapidly, * Tel.: (O), (H); fax: address: xuxc@stats.gov.cn (X. Xu) X/$ - see front matter D 2003 Elsevier Inc. All rights reserved. doi: /j.chieco

2 X. Xu / China Economic Review 15 (2004) playing an increasing role in the national economy. The macroeconomic management agencies demanded a well-designed description of the economic situation to promote the development of service industries and to coordinate different industries. To meet those demands, the National Bureau of Statistics of China (NBS) began studying the GDP in the United Nations System of National Accounts (SNA) beginning in the early 1980s. On March 19, 1985, the NBS submitted a Report on Establishing Tertiary Industry Statistics to the State Council (Administration Office of State Council, 1988). This document summarized the necessity of carrying out statistics on tertiary industry and GDP estimation 1 in China. The State Council later approved the report. On April 5, 1985, the State Council released a notice requiring GDP estimation in addition to national income estimation. In line with the report, the NBS established a system for GDP estimation at the national and provincial level that same year (National Bureau of Statistics, 1985) Developmental of China s GDP estimation From production-side estimation only to both production- and expenditure-side estimation At first, Chinese GDP was only estimated from the production side. The NBS adopted the expenditure approach for GDP estimation as an experiment in 1989, and then formally in From indirect to direct estimation At first, production-side GDP estimates were not calculated independently but derived from national income estimates by making the relevant adjustments and supplements. This required deducting the consumption of nonmaterial services from the net output of each material production industry and then adding the depreciation of fixed assets to obtain value added for each material production industry. Then the value added of each nonmaterial service industry was estimated by processing the final accounting data of revenue and expenses from fiscal authorities, data about financial statements gathered from financial institutions, tax data from the taxation authorities, data on wages and employment of nonmaterial production industries from the NBS, etc. GDP estimates were obtained by summing the value added for all industries. In 1992, the NBS switched to direct estimation from raw data sources (National Bureau of Statistics, 1990; 1993) From an ancillary indicator to a key indicator Although it did not cover nonmaterial service industries, national income was a key indicator, whereas GDP served as a supplemental indicator. Concurrent with reforms and increasing openness, the agencies of macroeconomic analysis and management paid more attention to GDP estimation. The NBS accordingly reinforced GDP estimation, making it the main indicator. In 1993, national income estimation was officially cancelled and the GDP became the key indicator of Chinese economic activity (National Bureau of Statistics, 1992) From annual estimation only to both annual and quarterly estimations Since 1992, the NBS has conducted quarterly GDP estimation. Quarterly GDP is estimated for eight industries: agriculture, forestry, husbandry and fishing; mining and

3 304 X. Xu / China Economic Review 15 (2004) quarrying, manufacturing, electricity, gas, and water; construction; transport, post and telecommunications; wholesale, retail trade, and catering; banking and insurance; real estate; others (National Bureau of Statistics, 1997b) Adjustment and further industry breakdown In 1995, according to the new standard of national economic industrial classification, the NBS adjusted the industry classifications for annual GDP estimation. The original 12 industries (agriculture, forestry, husbandry and fishing; mining and quarrying, manufacturing, electricity, gas, and water; construction; transport, post and telecommunications; wholesale, retail trade and catering; services for household and consultation; public utilities; banking and insurance; real estate; science, education, culture, health care, sport and social welfare; government agencies, parties and social organizations; others) were further disaggregated to 16 industries: agriculture, forestry, husbandry and fishing; mining and quarrying, manufacturing, electricity, gas, and water; construction; services for agriculture, forestry, husbandry and fishing; geological prospecting and water conservancy; transport and storage; post and telecommunications; wholesale and retail trade and catering; banking and insurance; real estate; social services; health care and social welfare; education, culture and arts, radio, film and television; scientific research and technological services; government agencies, parties and social organizations; others (Xu, 2001) Standardization of data sources and calculation methods In 1995 the NBS complied and published The Estimation Methods of China s Annual Gross Domestic Product, The Estimation Methods of China s Quarterly Gross Domestic Product, and the Manual of China s Gross Domestic Product Estimation. Each has standardized the data sources and calculation methods for step-by-step GDP estimation (Xu, 1999a). 2. Data formation and dissemination procedure of annual Chinese GDP estimation Data formation proceeds in three stages: preliminary estimation, primary revision, and final revision (National Bureau of Statistics, 1997a; Xu, 1998a) Preliminary estimation and data dissemination Preliminary estimation occurs early in the following year. Because the data sources for annual GDP estimation are limited at that time, the preliminary estimation is carried out mainly using preliminary statistics in specific fields (rapid reports) from different NBS departments. This results in preliminary estimation, which meets the need for preliminary analysis and judgement of the macroeconomic situation, awaiting revision by more reliable and more encompassing data sources. The preliminary estimation figures of annual GDP are released in China s Statistical Communique in February of the following year and in China s Statistical Abstract published in the first half of the following year.

4 X. Xu / China Economic Review 15 (2004) Primary revision and data dissemination Primary revision occurs in the second quarter of the following year, when annual statistical data collected by the NBS, annual statistical data by related ministries of the State Council, and part of the administrative records become available. However, most administrative records and data on final accounts are still not available at that time. The unavailable records include final fiscal accounts, financial accounts of institutions in banking, insurance, railway, civil aviation, post and telecommunications, etc. Therefore, the primary revised GDP figures are more accurate than the preliminary estimates, but still need further revision due to the unavailability of a number of important data sources. The revised figures at this time stage are generally released in the China Statistical Yearbook in the second half of the following year Final revision and data dissemination Final revision is made in the fourth quarter of the following year, when all of the statistical, accounting, and administrative data for annual GDP estimation are available. The final revised figures based on the comprehensive and detailed data sources are more reliable than the previous ones. The figures are released in the China Statistical Abstract and the China Statistical Yearbook in the second year following the accounting year Adjustments to the historical data and their dissemination In addition to preliminary estimation, primary and final revision, fixing GDP in historical terms requires adjusting the historical data. Historical GDP data are adjusted when one or more of the following conditions arise: New data sources are found or generated, where the data differ from the original. Changes are made to GDP-related classifications, e.g., changes in the classification of industries or the classification of final expending. Basic concepts, accounting principles, or calculation methods change significantly. Changes in these areas often lead to changes in the total value, structure, or growth rate of GDP. The data would lose comparability if the adjustments were not made to the historical data. The time span for adjusting historical data depends on the interval over which GDP estimation has been affected. 3. Important supplementation and adjustment of historical data Accounts have made two important supplementations and one important adjustment to the historical data.

5 306 X. Xu / China Economic Review 15 (2004) Two important supplementations Since the initiation of GDP estimation in 1985, China has made two important supplementations to its historical data to maintain continuity and comparability of data for microeconomic analysis and management. The first was made in to the data ranging from 1978 to 1984, the second in to the data from 1952 to Both made the same supplementations, including GDP estimation from both production and expenditure sides. The same methodology has been adopted for the two supplementations. Productionside GDP estimates are measured by the following steps: First, adjustments are made to net output in the MPS in five material production industries agriculture, forestry, husbandry and fishing; mining and quarrying, manufacturing, electricity gas, and water; construction; transport, post and telecommunications; wholesale, retail trade, and catering. Value added is obtained for each industry separately by deducting the payment on nonmaterial services (e.g., expenditures on banking and insurance services, advertisement, consultation, etc.) and adding the depreciation of fixed assets. Next, the value added is calculated for each nonmaterial service industry. Finally, GDP is obtained by adding the value added of all material and nonmaterial production industries. GDP from the expenditure side is measured in the following way: First, calculate household consumption expenditure and government consumption expenditure by deducting the value of materials as intermediate consumption in nonmaterial production industries from household consumption and government consumption from national income and adding the household and government total express on services provided by these nonmaterial production industries, respectively. Then calculate gross fixed capital formation in GDP by adding depreciation of fixed assets to net fixed capital formation in national income. Third, obtain net exports in goods and services by adding imports and exports of nonmaterial services to imports and exports for both goods and services in national income, respectively. Figures from the first supplementation in brief have been published in the China Statistical Yearbook The Gross Domestic Product of China, combines the detailed data for both supplementations One important adjustment The first important adjustment to GDP was completed in , shortly after the first census of tertiary industries in China. China had long been focusing on material production and the MPS regardless of statistics on the production of nonmaterial services. From the first years of GDP estimation, data sources concerning nonmaterial services production were feeble. The years after reform and opening up have seen rapid development of non-state-owned businesses in wholesale and retail trade, catering, and transport, yet official statistics do not cover all these industries. To solve the problem, China conducted the first nationwide census of tertiary industries between 1993 and 1995 (years 1991 and 1992 as census years). The census results were used to adjust the historical GDP data from both the production and expenditure sides for the years from 1978 to Production-

6 X. Xu / China Economic Review 15 (2004) Table 1 Retrospective upward percentage adjustment to GDP from production side Year GDP Tertiary industry Transport, post and telecommunication Wholesale and retail trade and catering Nonmaterial services side adjustments entailed a revision of value added in tertiary industries. The expenditure side saw revisions in final consumption expenditures. Table 1 provides the adjustment ratio for transport, post and telecommunications, wholesale and retail trade and catering, and nonmaterial services. A summary of the adjusted GDP data from both the production and expenditure sides was first published in the China Statistical Yearbook The detailed results are found in The Gross Domestic Product of China, The two supplementations to the historical GDP data met the need for macroeconomic analysis and management. One important adjustment enabled the historical GDP data to reflect the development of tertiary industries more accurately and provided a superior basis for the country to formulate rational industrial policies (Xu, 1998b). 4. Main data sources There are three main data sources used in Chinese GDP estimation. Statistics collected by the NBS on agriculture, forestry, husbandry and fishing; mining and quarrying, manufacturing, electricity, gas, and water; construction; wholesale, retail trade, and catering, fixed-asset investment; labor; wages; price; household income and expenditure, etc. and by other government agencies under State Council on transport, customs, balance of payments, etc. constitute the first source. Data also come from administrative records on final fiscal accounting of revenues and expenditures. The rest of the data come from final financial accounts by institutions such as banks, insurance companies, the Administration of Civil Aviation, the Ministry of Railway, the National Bureau of Post and Telecommunications, etc. The NBS data account for the highest proportion of all data. These data are collected and aggregated in various ways. For example, the data sources needed for calculating the value added of mining and quarrying, manufacturing, electricity, gas, and water are collected and aggregated in two totally different ways. For the state-

7 308 X. Xu / China Economic Review 15 (2004) owned enterprises and the non-state-owned enterprises with 5 million yuan of annual sales or more, the report forms on production, sales, and financial status formulated by the NBS are filled in by these enterprises, then the completed forms are returned to local statistical agencies. While the agencies aggregate the forms, the NBS aggregates these forms by itself and derives the enterprises value added based on these forms. For non-state-owned enterprises with annual sales of less than 5 million yuan and individual businesses, the data for value added calculation are collected in a sample survey by the Enterprise Investigation Organization of the NBS. The process is organized under the direct jurisdiction of the NBS. The sample survey is conducted by separating non-state-owned enterprises with annual sales of less than 5 million yuan from individual businesses. Then the provincial branches of the Enterprise Investigation Organization survey the first subpopulation according to a list of these enterprises if they exist in the province or in clusters if the name list does not exist, and investigate the second subpopulation in a clustering survey. Either the production units sampled or special investigators fill in the questionnaires. The Enterprise Investigation Organization derives the national total of the population based on samples. Another example is fixed-asset investment statistics. Either local statistical agencies or the units surveyed fill in report forms formulated by the NBS for fixed-asset investment data. Then the completed forms are aggregated level by level up to the NBS (Xu, 1999b). 5. Basic calculation methods GDP is estimated using both current and constant prices. Measured from the production side, GDP is the sum of value added by industry; from the expenditure side, it is the sum of final expenditures. Estimation at current prices uses prices in the current accounting period. Estimation at constant prices adopts base year prices. At present, 2000 is the base year for China. The basic methods used to calculate Chinese GDP are briefly explained below (Xu, 2000b; National Bureau of Statistics, 2001) Production-side estimation Estimation at current prices Production-side GDP at current prices can be calculated using either production or income approaches. The formula for using the production approach is as follows: GDP using the production approach ¼ X Value added in the production approach ¼ X ðtotal output intermediate inputþ In this formula, S denotes aggregation across all industries. Total output refers to the value of all goods and services produced in a given period by an industry. Intermediate input refers to the value of all non-fixed-asset goods and services consumed and used in the same period by an industry.

8 Table 2 Main data sources and basic calculation methods of value added at current prices by industries Industries Direct calculation part Indirect calculation part Agriculture, forestry, animal husbandry and fishing Mining and quarrying, manufacturing, electricity, gas, and water Construction Transport, post and telecommunications Coverage Whole Enterprises above cutoff level Enterprises rated at four or higher qualification Enterprises under the ministries Basic calculation methods Production approach Production approach Income approach Income approach Main data sources Coverage Basic calculation methods NBS agricultural production statistics Mining and quarrying, manufacturing, electricity, gas, and water statistics of NBS NBS construction statistics Final accounts provided by the Ministry of Transport, the Ministry of Railway, the National Administration for Civil Aviation, China Oil and Natural Gas Corporation, the National Bureau of Post and Telecommunications Enterprise below cutoff level and individual businesses Enterprises rated at lower than qualification four The rest Value-added ratio approach Value-added ratio approach Volume extrapolation method Main data sources Sampling survey on enterprises below cutoff level and individual businesses of mining and quarrying, manufacturing, electricity, gas, and water issued by the NBS NBS fixed-asset investment statistics Transportation and communication statistics from the Ministry of Transport, the Ministry of Railway, the National Administration for Civil Aviation, China Oil and Natural Gas Corporation, the National Bureau of Post and Telecommunications X. Xu / China Economic Review 15 (2004)

9 Wholesale and retail trade and catering Banking and insurance Real estate State-owned enterprises and non-stateowned large or medium-sized enterprises Main banks and insurance companies Real estate development and management Income approach Income approach Income approach Final accounts provided by the Ministry of Finance and the Ministry of Foreign Economy and Trade. Financial statements of the enterprises above the cutoff level in wholesale and retail trade and catering provided by the NBS Final accounts of main banks and insurance companies NBS real estate development statistics, final accounts of real estate management provided by the Ministry of Construction Others Other financial institutions Owner-occupied houses services of urban and rural households Calculation on total retail sale of consumer goods Estimation on balance of deposits and loans, premium Imputed depreciation of fixed assets of owner-occupied houses of households Total retail sale of consumer goods statistics provided by the NBS Financial statistics provided by the People s Bank of China. Insurance statistics provided by China Insurance Regulatory Commission Rural and urban household survey provided by the NBS, the data of construction cost of buildings provided by the Ministry of Construction 310 X. Xu / China Economic Review 15 (2004)

10 X. Xu / China Economic Review 15 (2004) The formula for GDP using the income approach is as follows: GDP using the income approach ¼ X Value added using the income approach ¼ X ðcompensation of employees þ Taxes on production; net þ Depreciation of fixed assets þ Operating surplusþ The compensation of employees includes all remunerations acquired by the employees for their participation in production activities. It is composed of three parts: (1) wages and salaries in cash, (2) wages and salaries in kind, and (3) employers social contributions. Net taxes on production stands for the difference between taxes and subsidies on production. Taxes on production are the different kinds of taxes, fees paid by producers to the government for their producing, delivering, sales and transferring goods and services, and for the use of production factors, for example, fixed assets, land, and labor for production purposes. They are composed of sales taxes, value-added taxes, operating taxes, stamp taxes, taxes on real estate, taxes on vehicles, etc. Subsidies on production comprise government subsidies on prices and operating losses to producers for their production activities. Depreciation of fixed assets refers to the drawn or imputed value used to compensate for the loss of fixed asset value during the production process. Operating surplus is the balance between value added and compensation of employees, net taxes on production, and depreciation of fixed assets. It mainly refers to business profits. As data sources vary from industry to industry, the production-side estimation of GDP at current prices in China adopts both the production and income approaches; that is, estimation of value added uses the income approach for some industries and the production approach for others. Table 2 shows the main data sources and basic calculation methods for the estimation of value added at current price for major industries. In Table 2, the enterprises above cutoff level refers to state-owned enterprises and non-state-owned enterprises with annual sales of 5 million yuan or more in mining and quarrying, manufacturing, electricity, gas, and water. The enterprises below the cutoff level are non-state-owned enterprises with annual sales below 5 million yuan of mining and quarrying, manufacturing, electricity, gas, and water. A comprehensive assessment of the quality of staff, management level, the amount of capital, and its past record determines the grading system for construction enterprises. 2 Enterprises assigned a rating of four or higher are qualified to undertake the more complex and expensive engineering and construction work. Enterprises rated at lower qualifications are all construction enterprises and units except enterprises assigned a rating of four or higher. The enterprises under the ministries in transport, post and telecommunications include national railway transport, highway transport, and waterway transport carried out by enterprises under the Ministry of Transport; highway transport and waterway transport carried out by enterprises under the guidance of local authorities in the system of the Ministry of Transport; national and local civil aviation transport; national pipeline transport, national

11 312 X. Xu / China Economic Review 15 (2004) post and telecommunications. The rest in transport, post and telecommunications include enterprises aside from those mentioned earlier. The main banks in banking and insurance industry include the central bank (People s Bank of China), policy banks, stateowned commercial banks, and other commercial banks; the main insurance companies include the People s Insurance Company of China, China Pacific Insurance Company, China Ping An Insurance Company, and other insurance companies dealing with life insurance and nonlife insurance. Other financial institutions include all financial institutions not included in either of these categories. The value of owner-occupied dwelling services of urban and rural households is equal to the imputed depreciation of owneroccupied dwellings. The imputed depreciation is calculated by the following formula: The imputed depreciation of rural owner-occupied dwellings equals the value per single room at the end of the accounting year times the average number of the rooms owned by the rural households sampled times the number of households in the rural area times 2% (depreciation rate) The imputed depreciation of urban owner-occupied dwellings equals the construction cost of a square meter of floor space of the dwellings owned by urban households times the total floor area of the owner-occupied dwellings of urban households times 4% (depreciation rate) Estimation at constant prices Production-side GDP at constant prices can be calculated in two ways: deflation and extrapolation. Deflation methods themselves are further divided into double deflation and single deflation. Double deflation means that both output and intermediate inputs at current prices are deflated by an output price index and an intermediate input price index, respectively, to calculate output and intermediate input values at constant prices. The difference between the output and input values is defined as value added at constant prices. Single deflation can be dealt with in two ways, one is to deflate value added at current prices by an output price index; the other deflates value added at current prices by an intermediate input price index. Extrapolation methods are also divided into double extrapolation and single extrapolation similar to the case of deflation. Double extrapolation indicates that output and intermediate inputs in the base period are extrapolated by using an output volume index and an intermediate input volume index, respectively, to get output and intermediate inputs at constant prices in the current accounting period. The difference between the former and the latter is defined as value added at constant prices. Single extrapolation can also be done in two ways, by extrapolating value added in the base period by an output volume index or by an intermediate input volume index. In practice, deflation and extrapolation methods are sometimes combined depending on the data sources. This mixed method can be applied into two ways, either using the deflation method for output and the extrapolation method for intermediate inputs, or using the extrapolation method for output and the deflation method for intermediate inputs.

12 X. Xu / China Economic Review 15 (2004) Table 3 summarizes calculation methods for value added at constant prices for main industries in China. In Table 3, the output volume index of agriculture, forestry, animal husbandry, and fishing at constant prices equals output at constant prices in agriculture, forestry, animal husbandry, and fishing in the current year divided by output at constant prices in agriculture, forestry, animal husbandry, and fishing in the base year. The detailed calculation method of output at constant prices of agriculture, forestry, animal husbandry and fishing is as follows: output at constant prices in the base year equals output at current prices in the base year; output at constant prices in nonbase years (those have same base year) is derived year after year according to an extrapolation method by using the growth rate of output value at constant Table 3 Basic calculation methods of value added at constant prices in main industries Industries Basic calculation methods Basic indices Agriculture, forestry, animal husbandry, and fishing Mining and quarrying, manufacturing, electricity, gas, and water Mixed method: extrapolation for output, deflation for intermediate input Single deflation Output: output volume index of agriculture, forestry, animal husbandry, and fishing at constant prices Intermediate input: price indices of production material and others corresponding to 13 kinds of intermediate inputs Output price indices, adjusted according to changes in raw material prices Construction Single deflation Construction and installation price index included in price index of fixed-asset investment, adjusted according to the difference between labor cost price index and raw material cost price index Transport, post and telecommunications Single extrapolation Transport: conversion turnover index from passenger and freight transport Post and telecommunications: index of business volume of post and telecommunications Retail price index Wholesale and retail Single deflation trade and catering Banking and insurance Single deflation Weighted average price index of consumer price index and price index of fixed-asset investment Real estate Single deflation Value added of real estate development: price index of selling of houses Value added of real estate management: consumer price indices Depreciation of newly increased household owner-occupied dwellings: price index of fixed-asset investment Depreciation of existing household owner-occupied dwellings: adjusted depreciation of owner-occupied dwellings at constant prices in the last period

13 314 X. Xu / China Economic Review 15 (2004) prices 3 in agriculture, forestry, animal husbandry, and fishing specific statistics. The 13 types of intermediate inputs of agriculture, forestry, animal husbandry, and fishing in Table 3 are seed, forage, fertilizer, fuel, pesticide, agriculture plastic film, power, small farm tool purchases, etc. The weights in banking and insurance are the proportions of household consumption expenditure and gross fixed capital formation in the sum of these two indicators Expenditure-side estimation Estimation at current prices The calculation of GDP at the current prices using the expenditure approach is as follows: GDP using the expenditure approach ¼ final consumption expenditure þgross capital information þ net export where final consumption expenditure consists of household consumption expenditure and government consumption expenditure; gross capital formation includes gross fixed capital formation and changes in inventories; net exports are exports of goods and services less imports of goods and services. Household consumption expenditure is the expenditure on goods and services for final demand by residential households. Household consumption expenditure includes both cash and noncash (imputed consumption) purchases. There are several types of household imputed consumption: acquired goods and services in the forms of wages and salaries in kind and transfer in kind, self-supplied goods and services such as self-supplied foodstuff in rural households. Purchases of dwellings and construction of owner-occupied dwellings are included in gross fixed capital formation, not in household consumption expenditure. Household consumption expenditure is broken down into seven components: consumption of traded consumer goods; consumption of ownproduced consumer goods; consumption counterpart of income in kind; consumption of services other than housing; consumption of housing, water, electricity, and gas; consumption of free medical services; and consumption of collective welfare services. Government consumption expenditure includes expenditure on public services provided by the government and net expenditures on goods and services provided to the households free or at reduced prices. Gross fixed capital formation is the value of fixed assets, which are purchased, transferred in, and self-supplied by residents, deducting the value of sold and transferred out fixed assets. The value of changes in inventories is equal to the value of the inventories acquired less the value of the inventories disposed of during the accounting period. Table 4 summarizes the main data sources and basic calculation methods of GDP at current prices using the expenditure approach Estimation at constant prices GDP at constant prices using the expenditure approach equals the sum of its components at constant prices, which are obtained by deflating the components of GDP

14 X. Xu / China Economic Review 15 (2004) Table 4 Main data sources and basic calculation methods of GDP at current prices using the expenditure approach Components Main data sources Basic calculation methods Household consumption expenditure 1. Consumption of traded consumer goods 2. Consumption of own-produced consumer goods 3. Consumption counterpart of income in kind 4. Consumption of services other than housing 5. Consumption of housing, water, electricity, and gas 6. Consumption of free medical services 7. Consumption of collective welfare services Government consumption expenditure The NBS statistics on total retail sales of consumer goods The NBS rural household survey The NBS urban household survey The NBS rural and urban household survey The rural and urban household survey, the NBS population survey, the statistics on the construction cost of per square meter of floor space from the Ministry of Construction The statistics on social security and welfare from the Ministry of Labour and Social Security The statistics on social security and welfare from the Ministry of Labour and Social Security The Ministry of Finance annual final accounting, the NBS Census of the tertiary industries Excluding retail sales to enterprises, government units, and public utilities, purchases of building materials by households for the construction and major repair of houses Consumption expenditures by rural households minus consumption expenditures in cash by rural households Average income in kind received by each urban household that reported having received in kind the proportion of urban households receiving income in kind among the urban households sampled the number of urban households in the country The sum of transport fees, postal and telecommunication fees, charges for medical and health care services, tuition, fees for adult technical training, fees for cultural and recreational services, fees for processing and repairing services, and other services expenditures The sum of rentals for dwellings, expenditures on water, electricity, and fuel, imputed expenditures on owner-occupied dwellings services by rural and urban household The sum of medical payments by state-owned units and medical payments by collective units The sum of payments by state-owned units and collective units to provide recreational and cultural facilities for their employees Current expenditures in operating expenses within the scope of budget, current expenditures in operating expenses within the scope of extra-budget, depreciation of fixed assets of government administrative units and nonprofit public utility units, the difference between the gross output and operating revenue of urban household commissions and rural villagers commissions (continued on next page)

15 316 X. Xu / China Economic Review 15 (2004) Table 4 (continued) Components Main data sources Basic calculation methods Gross fixed capital formation Changes in inventories Export Import The NBS fixed-asset investment statistics, the Ministry of Finance annual final accounting, the Ministry of Construction real estate final accounts and statistics, the Ministry of Land and Resources data on the area of newly reclaimed land and cost of reclamation per unit of area, and the data on the expenses of geological prospecting The specific statistics from the NBS, the consolidated final accounts of state-owned enterprises from the Ministry of Finance, the final accounts from the Ministry of Transport, the Ministry of Railways, the National Bureau of Post and Telecommunications, the Ministry of Foreign Trade and Economy The balance of payments from the State Foreign Currency Administration The balance of payments from the State Foreign Currency Administration Fixed-asset investment with a value of 500,000 yuan or more expenses for the purchase of land, existing buildings and structures, and existing equipment + fixed-asset investment below 500,000 yuan + the margins charged on new dwellings sold + costs of the transfer of ownership of dwellings + increase of produced intangible assets + costs of land improvement Calculated by ownership, the value of inventories at the end of the accounting period, minus the value of inventories at the beginning of the accounting period, then adding them up Export of goods and services Import of goods and services at current prices using price indices. Table 5 summarizes the basic methods and main price indices used for calculating GDP at constant prices under the expenditure approach. 6. Some measures taken by the NBS to improve GDP estimation In recent years, the NBS has taken a series of measures to improve GDP estimation and the accuracy of GDP data (Xu, 2000a) The reform of statistical survey methods The traditional statistical surveys, which relied on overall reporting, worked relatively well in the central planned economy, but showed significant shortcomings when exposed to the socialist market economy. In the socialist market economic system, private firms, shareholding enterprises, foreign-invested enterprises, and those invested from Hong Kong, Macao, and Taiwan account for a certain proportion in the economy. The old statistical surveys relying on overall reporting ask them to report to the government statistical agencies frequently, which creates a significant burden, making the enterprises reluctant to respond to those surveys positively. Hence, these kinds of surveys do not aid in the smooth implementation of statistical surveys and improvement in the quality of statistical data. In the socialist market economic system, numerous small-sized enter-

16 X. Xu / China Economic Review 15 (2004) Table 5 The basic methods and main price indices used for calculating GDP at constant prices by expenditure approach Components Basic methods Main price indices Household consumption expenditure Consumption of traded Deflation Retail price index consumer goods Consumption of own-produced consumer goods Deflation The price index of the gross output of agriculture, forestry, animal husbandry, and fishing Consumption counterpart of Deflation The goods subindex of the urban consumer price index income in kind Consumption of services other than housing Deflation The services subindex of the consumer price index Consumption of housing, water, electricity, and gas Consumption of free medical services Consumption of collective welfare services Government consumption expenditure Deflation Deflation Deflation Deflation Consumption of housing renting services, water, electricity, and gas: the rental subindex and the subindex of water, electricity, and gas in the consumer price index; the services provided by new dwellings in owner-occupied dwelling services: the price index of fixed-asset investment; the services provided by existing dwellings in owner-occupied dwelling services: adjusted the owner-occupied dwelling services at constant prices in the previous year The simple average of the subindex of articles for medicine and health care and the subindex for medical and healthcare services in the consumer price index The service subindex of the consumer price index Expenditures on goods: retail price index; expenditures on services: the services subindex of the consumer price index; expenditures on wages and salaries: the consumer price index; depreciation of new fixed assets: the price index of fixed-asset investment; depreciation of existing fixed assets: adjusted depreciation of fixed assets at constant prices in the previous year Gross fixed capital formation Deflation The price index of fixed-asset investment Changes in inventories Deflation Production material: ex-factory price index of production material Living material: ex-factory price index of living material Agricultural products: producer price index of agricultural products Export of goods and services Deflation The goods export price index, adjusted according to relevant service price indices in home Import of goods and services Deflation The goods import price index, adjusted according to relevant service price indices of some countries which are main exporters of services to China prises and individual businesses appear, but they often have no sound records of production, income and expenditure, balance sheets, and so on, so it is impossible to ask all of them to fill in the statistical questionnaires and to guarantee the reliability of their reports. Over the past years, the NBS has spent much effort implementing the sampling

17 318 X. Xu / China Economic Review 15 (2004) surveys in an attempt to relieve the burden for grassroot units and improve the quality of statistical data. For example, sampling surveys have been conducted continuously for output of grain and cotton and for output, taxes, wages, and profits of non-state-owned enterprises with annual sales of less than 5 million yuan in mining and quarrying, manufacturing, electricity, gas, and water. These data played a role in improving the quality of GDP estimation The reform of statistical aggregating methods The traditional statistical survey data were aggregated from the grassroots level to the top. Although this method is advantageous for meeting the needs of economic management agencies at all levels, it cannot eliminate certain drawbacks. Typically, the statistical data were prone to interference from human factors, and the aggregation process tends to undermine quality. In recent years, the NBS has introduced some effective aggregating methods that ensure the reliability and objectivity of aggregated data, especially the superaggregating method. Since 1999, instead of going through regional statistical offices, the NBS directly aggregates the production and sales value report of mining and quarrying, manufacturing, electricity, gas, and water enterprises and the financial statements of mining and quarrying, manufacturing, electricity, gas, and water enterprises in the Annual Statistical Report, and directly aggregates the sampling-surveyed data of grain output and farmers income, etc The increased scope of statistical surveys In recent years, the NBS had continued to enlarge the scope of statistical surveys and fill in the gaps. For example, in the past rural production in mining and quarrying, manufacturing, electricity, gas, and water were beyond the statistical surveys of the NBS system, whose data were collected by a related management agency. The third census of the industry in 1995 discovered obvious overestimation in the data of the rural part of the industry. To improve its data quality, the NBS began applying the sampling surveys to it beginning in There are some gaps in the coverage of China s traditional services statistical surveys. To solve the problem and to find benchmarks for the services statistical data, the NBS established a regular census system of tertiary industries in The coverage of total fixed-asset investment statistics was also incomplete, excluding fixed-asset investment from urban private firms and individual businesses (but including private investment on building dwellings in the plant and mine district in urban areas). After having constructed the pilot statistics with this part of fixed-asset investment, the NBS has incorporated them into the coverage of total fixed-asset investment statistics The reform of calculation methods for value added at constant prices of mining and quarrying, manufacturing, electricity, gas, and water Value added at constant prices in mining and quarrying, manufacturing, electricity, gas, and water has been derived on the basis of the traditional gross output value at

18 X. Xu / China Economic Review 15 (2004) constant prices 4 of the industry since What follows is the main idea of calculating traditional gross output value at constant prices of the industry. First, the NBS, together with some related ministries of the State Council, worked out a catalogue of constant prices for various kinds of products in the industry, using base year prices, which were supplemented by provincial statistical bureaus, together with related departments at the same level. Then all enterprises in the industry were required to use this catalogue to calculate their gross output value at constant prices. Pooling the gross output value at constant prices over enterprises from bottom to top would result in regional or national gross output value at constant prices of the industry. This method has the advantage of meeting the needs of economic management agencies at different levels simultaneously, but also possesses disadvantages. First, many new products that were introduced after the base year have no constant prices, making it difficult to avoid using current prices as a replacement for constant prices without fully removing the influence of price changes. Current prices are commonly used as constant prices in measuring gross output value at constant prices of the industry for the rapidly developing town and township-run enterprises due to the restriction of data sources and lower qualification of accountants. Second, the level-by-level aggregation of gross output value at constant prices increases the odds of interference. Some leaders of stateowned enterprises and local governments, motivated by personal political interests, intervene in the statistical data directly or indirectly. Third, economic theory and practice show that product shares will shift in favor of products with declining relative prices. Thus, the growth rate of gross output value derived from fixed price weights is usually overestimated and this overestimation increases each year. Since 1990, the gross output value at constant prices of mining and quarrying, manufacturing, electricity, gas, and water in China has always used 1990 as the base year. As the product structure and prices change during this period, the growth rates of gross output value at constant prices of the industry derived from fixed price weights will inevitably affect the accuracy of growth rates of value added at constant prices of the industry and GDP at constant prices. Taking this into account, NBS has been experimenting with reforming the calculation method of the value added at constant prices of the industry in recent years. Now, the NBS tries to adopt the price index deflation method to calculate value added at constant prices for mining and quarrying, manufacturing, electricity, gas, and water. 7. Some problems with China s GDP estimation and proposals and ideas of its reform Some problem in China s GDP estimation should receive attention (Xu, 2002). First, the industry classification and expenditure categories are too aggregated to meet the needs of analyzing the production and demand structure or to deliver necessary data to international organizations. The industry of mining and quarrying, manufacturing, electricity, gas, and water is an excellent example. So far, although the value added of the industry accounts for about 44% of GDP estimates, it is only shown as one industry. This system cannot meet the needs of analyzing the development trends of its various subindustries and its structural change, primarily because the sample survey of non-state-

19 320 X. Xu / China Economic Review 15 (2004) owned enterprises with annual sales of less than 5 million yuan and individual business does not provide detailed subindustry information. Second, a regular (annual) survey system for nonmaterial services has not been established since the first census of tertiary industries. The value added of many rapidly developing new services such as accounting, legal services, information consultancy, non-public-run education, and so on are estimated mainly based on the wages and taxes of these industries. Therefore, GDP estimation does not properly incorporate these activities. Third, quarterly GDP estimation has suffered from data limitations, allowing for neither any production measurement on quarterly basis, nor quarterly expenditure measurement. Quarterly GDP measurement, whether production or expenditure based, will better reflect the most recent national economic developments and provide a better foundation for shortterm macroeconomic analysis and decision making, compared with cumulative quarterly production-side GDP measurement implemented in China since These short-term data are crucial as the State implements an active fiscal policy and robust monetary policy, increases infrastructure investment, and expands exports. Fourth, there are some weak points in GDP estimation at constant prices due to the lack of price indices. So far, China has not compiled a producer price index for services; most of the value added at constant prices of service industries is derived from the corresponding service subindices of the consumer price index (CPI). However, for some services such as advertising, whose consumers are not households, there is no corresponding CPI item. In this case, the possible alternative is to use the related price indices, which affects the accuracy of their value added at constant prices. Statistics on the import and export of services at constant prices will remain unsatisfactory until price indices for the import and export of services are constructed. Fifth, the nonobserved economy (NOE) is not shown fully in GDP estimation. According to the OECD definition, the NOE includes illegal production, underground production, production activities of the informal sector, and so on, which are easily missed by the basic data collection system. In line with the information provided by the OECD, the percentage of value added created by those production activities in GDP estimates is up to 3% in Australia, 15% in Italy, and 25% in Russia. Although China s GDP estimation covers part of the NOE (e.g., the production activities of own-produced agricultural products by farmers), a comprehensive, deep-going and systematic study on it has not been conducted. Besides, some necessary effective statistical means and measures are still unavailable; it is unavoidable to miss some production activities in GDP estimation. Finally, local leaders tend to interfere with some of the statistical data due to a lack of independence for the statistical system. Although the NBS has taken many measures to evaluate and adjust the statistical data, it is very difficult to eliminate malfeasance and remove all unnecessary involvement. Taking these aforementioned problems with China s GDP estimation into consideration, this paper proposes the following changes. First, the data should reflect the internationally accepted classification standard. In particular, the classification of mining and quarrying, manufacturing, electricity, gas, and water should be further disaggregated. Second, the authorities should establish a regular (annual) survey system for the services

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