Monday, 26 January 2009

New data on China’s GDP and its total savings compared to the US

Two important sets of GDP data for China have been published recently.

The first, which has received wide publicity, is that China's economy grew by 9.0 per cent last year and at an annualised rate of 6.8 per cent in the year to the last quarter of 2008. This, as widely reported, is a significant slowdown from China's 13.0 per cent growth rate in 2007 and the first time since 2002 that China's annual growth rate has been less than 10 per cent.

Given China's rapid economic growth earlier last year this implies nil, or only marginal, growth in the last quarter of 2008. China's growth performance for the year as a whole, however, is far more rapid than for any other major economy and even the weak last quarter still compares favourably to the sharp recession in the US, UK and Japan.

Ma Jiantang, China's Commissioner for the National Bureau of Statistics, in releasing the GDP figures stated that there were signs of some revival in December – noting an upturn of consumer spending. He stated: 'The overall performance of China's economy, which is steady and fast, has not changed. The unexpected international financial crisis will not change this. The deep-rooted and underlying fundamentals that drive China's growth remain unchanged.' China's money supply was also expanding rapidly by the end of the year - indicating a first effect of China's economic stimulus package. However future figures will be required to evaluate Mia Jiantang'sconclusions.

The second set of data, which are highly interesting, is that the IMF has released figures consistent with its international standards for China's GDP in 2007. This casts considerable light on key strategic issues confronting China and also on comparisons with the US.

Comparisons of China and the US typically focus either on the relative sizes of their economies or on particular sectors where China is catching up with or has overtaken the US in absolute terms – steel production, total manufacturing output, mobile phone usage, internet users etc. However, from the point of view of both the international financial situation and judging China's growth potential, a critical issue is that of China's fundamental macro-economic indicators – its savings and investment rates. China's savings, not simply personal savings but including savings by companies and government, are the measure of its finance available for domestic or foreign investment.

These are substantial statistical difficulties in calculating comparisons in savings between the US and China – in China's case the official exchange rate understates the size of its economy compared to calculations using more realistic Parity Purchasing Powers (PPPs), for the US there are significant divergences between different measures of savings etc. Nevertheless the ballpark comparisons that can be made on the basis of the new data are highly revealing.

At official exchange rates in 2007 China's GDP was 24 per cent of that of the US - $3.3 trillion compared to $13.8 trillion. As calculated by the IMF in PPP terms for the same year, China's GDP was 51 per cent of that of the US - $7.0 trillion compared to $13.8 trillion. Essentially similar figures have been calculated by the World Bank and the CIA. China's economy is between on quarter and one half the size of that of the US.

Savings are, by an accounting identity, necessarily equal to fixed investment, plus increase in inventories, plus the current account of the balance of payments. On IMF data US gross domestic capital formation plus inventories, minus its' balance of payments deficit was equal to 10.7 per cent of US GDPin 2007 - $1,477 billion. More direct measures of US savings give a figure of 14.2 per cent of GDP - $1,956 billion. The parameters of US total saving, that is finance available for investment, may therefore be taken as $1.5 - $2.0 trillion dollars.

The proportion of China's economy devoted to gross domestic fixed capital formation (fixed investment) rose to 42.7 per cent of GDP from 40.8 per cent in 2006, the highest level on record. Inventories grew by 2.0 per cent of GDP, giving a combined figure with fixed investment for 44.7 per cent of GDP - equivalent to $738 billion at official exchange rates and $1,566 billion at PPP exchange rates.

China's balance of payments surplus for 2007 was $372 billion – which, as China's trade is overwhelmingly denominated in foreign currency, may be directly compared in currency terms to the savings figures for the US. It implies China's balance of payments surplus is therefore equivalent to 11.3 per cent of GDP at official exchange rates and 5.3 per cent of GDP in PPP terms

Therefore adding domestic and international savings together gives a lower bound for the real value of China's savings, using official exchange rates, of $1,110 billion and a probable upper bound, using PPP figures, equivalent to $1,938 billion. This equates to savings rates for China of 56 per cent, if official exchange rates are used, and 50 per cent if a PPP exchange rate is used.

If even the lower figure is taken, that is 50 per cent of GDP, a necessary corollary is that China's total savings in absolute terms will be as large as those of the US when its economy is only half the size of that of the US. If the higher percentage is used then China's total savings will exceed those of the US before it is half the size of the US economy.

It may, therefore, already be the case that China's total savings have reached in absolute terms those of the US. More probably its savings are still somewhat lower than those of the US in absolute terms but they are already approaching it.

While China's GDP will not overtake that of the US in absolute terms for some time, China has therefore either already overtaken the US as the world's greatest source of finance for investment or will do so in a relatively short time frame.

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This article originally appeared on the blog Key Trends in Globalisation

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