China's Even Heftier Economy

A new economic census is expected to show healthier, more robust private-sector growth and a wealthier consumer class

By Dexter Roberts

Everybody knows China is big. But guess what: It's even bigger than has been generally believed. Beijing is abuzz with rumors that on Dec. 20, the country's statistics mavens will revise mainland gross domestic product upward, by around 20%. The revision means China's output actually totals $1.74 trillion, about $300 billion more than previously thought.

That would make China the world's fourth-largest economy, suddenly overtaking Italy, France, and Britain. And it would peg the mainland's output at 18% that of the U.S. and 30% as large as Japan's, "bringing us several years closer to the day [still a couple of decades out] when China's GDP overtakes that of Japan and the U.S.," says Stephen Green, an economist at Standard Chartered in Shanghai.


  The startling shift comes from China's just-finished economic census. Though the survey data haven't been officially released, many prominent China watchers know the broad outlines of the results -- and feel generally pleased with what they're hearing. The poll, the mainland's first such endeavor in almost a decade, is expected to reveal the true size of the private sector.

China's rapid shift toward a market economy had prevented Beijing from getting a handle on just how big its economy has grown. And those problems worsened because of underreporting among private service enterprises -- such as restaurants, hairdressers, and travel agencies -- seeking to avoid taxes. But over the past year, millions of poll-takers fanned out across China, offering business owners assurances that the information gathered would remain private -- a promise that by most accounts has been kept. That, officials say, has allowed them to cobble together a much truer picture of the mainland's roaring economy.

Among the important findings: China's economy has gotten not only bigger but also healthier. For starters, concerns that the mainland economy relies too much on heavy investment spending should abate. The new numbers will likely show that China's investment as a portion of GDP could be as low as 37%, rather than the 46% assumed previously. That puts China's figure in line with the likes of South Korea, Japan, and Hong Kong at comparable stages of development.


  "Over the last few years, everyone has been very concerned about overinvestment in China," says Green. "This brings China closer to the norm for a globalizing country."

China's services sector amounts to much more than most thought, too. Services are expected to account for as much as 40% of GDP, compared with last year's official 33%. It also proves consumption is much larger, perhaps 60% of GDP. That will certainly please Chinese economic policymakers, who have long aimed to wean the mainland from excessive reliance on investment and exports, and boost the spending power of the Chinese consumer.

"This undercuts the common view that Chinese consumers are chronically weak," Jonathan Anderson, chief economist for Asia at UBS Securities, wrote in a Dec. 14 report.


  There's even good news for China's long-troubled banking sector. Official figures show that nonperforming loans added up to $158 billion at the end of September. That's still huge, but a bigger economy makes the problem more manageable. With the revised figures on GDP, China's dud loans would represent 7% of GDP, compared with the 8.25% that had been previously thought.

Similarly, China's ratio of external debt to GDP falls to about 10% in 2005, from 13.8% at the end of last year. "People have been very concerned about the rate of lending in China and the growth of nonperforming loans, and this shows they are moving in the right direction," Green says. "Worries about a debt crisis or a banking crisis in China are currently not that serious."

Finally, the census shows Chinese people are wealthier. That may come as little surprise to anyone who has seen all the new Buicks (GM ), Hyundais, and Chevys on the streets, as well as the Motorola (MOT ), Nokia (NOK ), and other cell phones in people's pockets.

Now, it appears the numbers will start to better match the perception. China's 2004 estimated per capita urban GDP of $1,277 will grow to $1,738 for 2005. That newly revealed spending power will certainly delight multinationals diving into the mainland market, though it -- and the rest of the new data -- may also spur increased hand-wringing in global capitals over China's meteoric rise.

Roberts is BusinessWeek's Beijing bureau chief

Edited by Edited by David Rocks

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