China looms larger

The Chinese government has just announced that its official statistical system has been under-estimating the size of the economy, the services sector in particular. In the process of upgrading its measurement and estimation methodology, it has increased its estimate of 2004 GDP by almost 17 per cent. Since most of the adjustment was made in services, the share of services in GDP increases to about 41 per cent. This scaling up will gradually be done for previous years as well, so its impact on the growth rate will not be as significant. For people used to working with growth rates, the change will not affect any of their conclusions and inferences about Chinese economic performance. However, in terms of absolute magnitudes of GDP, the significance of this revision is that it moves China a few notches up the ranks of the world's largest economies. On the basis of the new numbers, it is now the sixth-largest, behind the US, Japan, Germany, the UK, and France, and ahead of the next largest European economy, Italy. This is presumably a source of great pride to the Chinese and justifiably so.

It is tempting to see these changes as being "motivated", but the reality is that such things are not uncommon. Statistical systems are hardly cast in stone and, particularly in developing economies, are constantly trying to keep up with the changing structure of the economy as well as the availability of new information. When India changed the base of its National Accounts Statistics, which generate the GDP numbers, from 1980-81 to 1993-94, the absolute magnitude of GDP saw an upward adjustment of around 10 per cent, mainly because some new activities were judged to have been under-estimated by the previous approach. That is exactly what China has done; India will soon go through another cycle of change of base and no one should be surprised if the same thing happens here. The best way to read this is as a purely technical adjustment, which allows a slightly more precise measurement of economic activity.

But, because China is already in the big economic leagues, changes in rank will inevitably rankle. There are indications that this change will reinforce the protectionist lobby within the US, which is urging the government to impose punitive tariffs on imports from China. The larger China's economy appears to be, the less justification will be seen in treating it differently from its peers in the developed world. Clearly, no European country would have gotten away with the exchange rate policy that China has followed for so many years. Fortunately for China, this lobby is countered by representatives of the large mass of American consumers, who have benefited immensely from the low prices of Chinese imports and the value for money that they offer.

From India's perspective, the fact that the Chinese economy is larger than previously estimated should not make much of a difference if businessmen know their markets, because the Chinese economy remains what it was; only its measurement has changed. The scale of demand in any sector will still be what it was earlier. Nevertheless, since China seems set to overtake both France and Britain and become the fourth-largest economy in the world, the message has to be that Indian businessmen should take the Chinese market very seriously indeed, if they have not already done so.