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This looks like it might become a recurring series on this blog.

A new Barclays research piece, China: Beyond the Miracle  – The Great Wave of Consumption Upgrading , lays out the case for consumption being significantlyundervalued in official Chinese statistics. The points made in this report have been

picked up by both the Financial Times  and the Wall Street Journal . 

According to the Barclays report, there are two main reasons to be skeptical ofofficial data which show consumption declining as a share of GDP over the pastdecade.

Reason 1: “The widening gap between consumption growth and retail salesgrowth likely implies that the growth rate of consumption has also beenunderestimated, at least in recent years.” 

This goes back to the retail sales of consumer goods statistic that we analyzed

earlier this month. There is a significant discrepancy between consumption as ashare of GDP and retail sales of consumer goods. Barclays concludes that thisshould lead us to be skeptical of the official consumption statistics.

However, when you take a closer look at what’s included in the retail sales of consumer goods statistic, it becomes clear that relying on this as a proxy forconsumer activity is problematic. The statistic combines the sales of both retailersand wholesalers. Moreover, sales are recorded by the point of sale, not the type ofbuyer. Thus businesses purchasing supplies from retail outlets will be included in thisstatistic. This is a significant problem for data accuracy given that private enterprisesand self-employed individuals, the businesses most likely to purchase from retailoutlets, have doubled over the past decade to 30 percent of urban employment. Theemployment share of state-owned enterprises, which are more likely to have theirown supply networks, has fallen from 42 percent of urban employment to 19 percent.

By itself, the discrepancy between retail sales of consumer goods and officialstatistics is not sufficient to discredit official household consumption statistics.

Reason 2: “According to one major study (Wang and Woo 2011), China’shousehold income was underreported by 66% in 2008, which could betranslated into underestimation of GDP by 10%. The underreported income

was concentrated mainly in high-income households.”

“The same study suggested that household consumption was probablyunderreported by 20% in the same year……. Therefore according to the study,both total consumer spending and consumption share of GDP wereunderestimated.” 

The Wang study critiques the National Bureau of Statistics (NBS) Household Survey,which is the basis of official consumption statistics. Wang creates an alternativeestimate of income levels in the study. Barclays then uses these estimates toconstruct several alternative measurements of the consumption share of GDP, which

range from moderately to significantly higher than the official level.

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Should we be suspicious of Chinese consumption statistics? Certainly to someextent. See the appendix of Sustaining China’s Economic Growth After the GlobalFinancial Crisis for a detailed discussion on why official statistics underestimatehousing services and therefore underestimate consumption as a share of GDP by acouple of percentage points. Does the Wang study provide a better estimate of

consumption levels? Probably not.

If you dig into the details of this study you’ll quickly notice some problems. The Wangstudy asserts that the NBS household survey is flawed because many high-incomeresidents were unwilling to participate in the study and those that did were reluctantto report their full income.

In order to avoid this problem, the Wang study asks survey staff to only interviewpeople they are personally familiar with in hopes that they will answer more honestly.

This should stand out immediately as example of major sample bias. To their credit,

the authors acknowledge that this is not a random sample and cannot be used todirectly extrapolate the general distribution of urban household income.

Beyond not having a random sample, there are major methodological issues withthis approach. Unlike the national household survey which requires participants todocument in real time their consumption activities over a set period, the Wangsurvey is reported based off memory. Asking personal acquaintances tell you theirincomes will undoubtedly result in errors. The Wang study asserts that these errorswill be random and will average out with a large enough sample. This is an optimisticassumption, it’s quite possible that people will systematically distort there incomewhen talking to someone they are familiar with.

The data from participants is then analyzed using Engel’s coefficient to estimateactual levels of income. There are plenty of skeptics (Chinese language) when itcomes to using Engel’s coefficient to estimate income in China. The Wang studyadopts a modified Engel’s coefficient to account for some of the problems, but their method has been criticized (Chinese language) by the NBS for being insufficient inaccounting for variability caused by factors other than income.

Bottom line, any estimate that relies on a blatantly nonrandom sample composed ofself-recollected income should be viewed with a bit of suspicion. The margin of error

for this type of exercise is likely to be quite high. There may be problems with theofficial data on consumption, but this study by itself is not sufficiently rigorous to formthe basis of new estimates.

Overall, the two non-official measures of consumption endorsed by the Barclaysreport appear to be highly problematic and unsuitable as the basis for an alternativemeasurement of consumption.