It is increasingly accepted that China’s consumption is underestimated, while its investment is overestimated. Two studies, among others, have shed light on the subject. One is on unreported ‘grey’ income by Professor Wang Xiaolu of the National Economic Research Institute; the other is on consumption underestimation by Professors Zhang Jun of Fudan University and Zhu Tian of the China-Europe Business School. Many have heard of these studies, but most believe that the difference is insignificant.
By combining the results of the two studies, however, my conclusions show very significant changes to China’s GDP composition. The corrections would raise household consumption by 11 per cent of GDP, while reducing the shares of investment and government spending by 8 per cent and 3 per cent of GDP, respectively.
Even that only brings consumption from 36 per cent to 47 per cent, still a long way away from desirable. But the implication is profound: it would mean that China need not be so aggressive in slowing investment and that it has less scope than previously believed to stimulate consumption.
1) household income is underestimated due to massive unreported ‘grey income’, particularly at the high end. By extension, ‘grey consumption’ is also left out. Wang finds that grey income amounted to Rmb6.2tn ($1tn) in 2011. He also estimates that GDP is underestimated by Rmb3.7tn. This implies that government and enterprise incomes are overestimated by Rmb2.5tn, which would curb their spending and investment. In other words, the Rmb3.7tn of additional GDP should be entirely classified as consumption.
2) the value of housing use is underestimated. The GDP data put the value added of both owner- and tenant-occupied housing at an average of just Rmb1,868 a year or Rmb156 a month per household (both rural and urban). If we assume Rmb500 a month, which is still on the low end, then the extra rental value would be about Rmb1.7tn, which would be additional service consumption within GDP. By contrast, US GDP data assumes about $1,200 a month per household.
3) a large amount of household consumption is disguised as business costs, government spending and investment. Vehicle use, gifts, vacations, meals, even groceries can be counted as business costs, so long as tax receipts can be procured.