By Mark Magnier
Wall Street Journal
Dec 19, 2014

New Calculation Adds About 3.4% More to 2013 Data

BEIJING — With the stroke of a pen, China announced Friday that world’s second largest economy was 3.4% larger last year than previously thought — chiefly due to a more accurate counting of services and their impact on economic output.

China’s 2014 gross domestic product will be calculated using the new methodology when the full-year results are released next month.

The new calculation added 1.92 trillion yuan ($308.3 billion)—or about the equivalent of the economy of a Colorado or a Singapore—to the size of China’s economy in 2013, bringing it to a total of 58.80 trillion yuan.

While at one level the statistical change is fairly arcane, it should give investors and policy makers a more accurate picture of the economy as Beijing tries to pivot from investment-led growth in industry and infrastructure toward services and consumption.

“I think they’re genuinely trying to improve the quality of the numbers,” said Michael Pettis, professor at Peking University’s Guanghua School of Management. “When you have bad numbers, it’s hard to make policy, and this is especially important in China, where the single most important player is the government.”

Analysts said the recalculation likely moves forward the date approximately a decade from now when China’s economy is projected to surpass the U.S.’s as the world’s largest. The U.S. surpassed the U.K. as the world’s largest economy in 1872. China has been expected to surpass the U.S. as the world’s largest economy around 2024 or 2025.

Aside from bragging rights, however, China’s population will remain four times that of the U.S. That means its citizens will be less wealthy on average than Americans and its government, analysts said, will face issues on how to raise living standards beyond those of middle-income countries even as the maturing economy continues to slow.

China’s National Bureau of Statistics earlier this week announced the coming revision would be about 3%. In a statement on its website Friday, the bureau said that the new method would “basically” not affect its calculations of economic growth this year. China is expected to miss its annual growth target—set at about 7.5% in 2014—for the first time since 1998.

Friday’s 3.4% revision in absolute terms is smaller than the 16.8% and 4.4% upward adjustments China announced in 2004 and 2008, respectively, after earlier recalculations of gross domestic product. The statistics bureau said Friday it will release GDP figures for earlier years using the new methodology, though it provided few details on the method.

The change bumps the share of services in economic activity up to 46.9% in 2013 from 46.1% at the expense of agriculture and manufacturing. It was made after collecting more comprehensive factory and service-sector figures as part of the recently completed national economic census, it added.

Some economists said the recalibration doesn’t appear to address the undercounting of consumption by China’s huge migrant population and other underlying problems that affect the accuracy and consistency of Chinese data. “They’re just playing at the margin, not doing anything substantive. Three percent is neither this way nor that,” said Ramesh Chander, a former World Bank adviser to China and author of a book on Chinese statistics. “The Chinese national accounts have been cryptic for a large part.”

Information provider Rhodium Group, in a report, said it expects that the system China has adopted for the recalculation is based on the System of National Accounts 2008 devised by the U.N. and other organizations. That system gives more weight to services, counts research and development, which China excluded before, and incorporates a rental-based revaluation on housing services. On other fronts, China is also expected to count land transfer income and treat stock options as employee compensation.

“Anything the government does to try and improve its statistics has got to be welcome, especially the service sector which is underrepresented,” said Matthew Crabbe, Asia-Pacific research director at Mintel, an information provider. “Services are as important as retail and probably growing as fast.”

The changes to China’s national accounts are modest compared with countries such as Kenya, Nigeria and Italy that revamped their methodology in recent years to better capture the informal economy, resulting in GDP size increases of up to 89%.

Problems with the reliability of Chinese national statistics tend to be more the result of systemic problems and skewed data from below than conscious manipulation by Beijing, said Mr. Chander, who worked closely with China’s statistics bureau while at the World Bank.

In one example, the sum of GDP reported by Chinese provinces has exceeded the national GDP figure in recent years, often by a significant amount. For the first half of this year, the sum of GDP figures for 31 provincial regions was 10% higher than the national figure, a discrepancy a government economist has attributed in September to different calculation methods.

The discrepancy has been attributed by a government economist to different calculations, but the phenomenon also reflects what’s sometimes dubbed “GDP worship” under which officials are promoted largely based on local economic growth, creating an incentive to inflate the figures.

“NBS used to tear its hair out,” Mr. Chander said. “Four or five years ago, they started doing their own calculations so they’re not as dependent on provincial data.”

—Grace Zhu and William Kazer contributed to this article.