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A Credit Suisse study suggests that Chinese households are hiding 9.3 trillion yuan of grey income

If China is earning 9.3 trillion yuan of “grey income”, does that mean the country’s economy is 30% bigger than we thought? Not quite. China’s GDP figures do not rely on the NBS household survey, but on “flow-of-funds” data collected from enterprises. And some of the shadow income pocketed by Chinese families may already show up elsewhere in the national accounts, as corporate income or government income—it may be misreported, not unreported. The upshot is that China’s economy was about 10% bigger in 2008, according to Credit Suisse.

Mr Wang also assumes that people lie about how much they earn, but not about how much they spend or eat. Or if a household does underreport its spending, he assumes that it also downplays its food expenses proportionately, so that their Engel’s coefficient is unaffected.

If people underreported their overall spending, but told the truth about their food spending, their Engel’s coefficients will be artificially high. Mr Wang would therefore have paired them with the poorer households in his survey. In those circumstances, their underreported income would go undetected. If that’s the case, then 9.3 trillion may be an underestimate!

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