China’s official household consumption data is not what it seems says Morgan Stanley. According to the bank, calculations have systematically under-estimated consumption, possibly missing out on $1.6 trillion, suggesting that China’s growth is already being driven by household expenditure.

In its latest Asian Insights report, the bank challenges China’s household consumptions statistics, saying they do not match the experience of other large economies taken during growth phases. In fact, Morgan Stanley’s recordings suggest The Mainland’s consumption habits are starting to look similar to its developed market peers.

Policymakers and commentators have made a big point about how China's growth has been largely fueled - until recently - by exports, an issue that has at times been controversial, such as in encouraging protectionist sentiment in countries like the US. 

China’s economic growth has generally been understood to be largely export-driven (2002-2007) and then investment-driven (2008-2012). According to official data, China now has a Gross Fixed Capital Formation / GDP ratio of 49 per cent, much higher than other large economies during their rapid growth phases. It has a household consumption / GDP ratio of 35 per cent, much lower than any other large economy and below other large economies during their rapid growth phases, the report said.

“In our view, using detailed bottom-up data on consumption items, China’s official statistics have not kept pace with major structural changes in household consumption. This is particularly the case in modern sectors such as housing, auto, tourism, healthcare, and insurance services,” Morgan Stanley said in the report.

Consumption driving growth

The bank’s data suggests that the transition to consumption-driven growth has already been under way for some time.

“[Our] bottom-up data suggest the household consumption / GDP ratio has risen by 2.4ppt since 2008 whilst the official data indicate it has fallen by 0.5ppt. Our lower estimate of GFCF / GDP at 41 per cent suggests China has not been such an outlier versus other countries in its investment trajectory,” it said.

The firm also suggests that consensus concerns on over-leverage and diminishing returns on investment at the whole economy level are overstated.

Criticism

The report goes on to criticise how China’s National Bureau of Statistics measures consumption.

The report says there are four main factors leading to considerable understatement of household consumption in official statistics:

1,             Under-estimation of the rapid increase of imputed rent

2,             Tax evasion motivated under-reporting

3,             A significant under-estimation of service consumption

4,             Error in estimating gift consumption

For instance, tourism and auto spending were named as the two largest contributors to discrepancy [accounting for more than 40 per cent]. The bank believes that both categories are under-recorded in the official data as evidenced by cross-checking industry revenue data with official spending date.

Meanwhile, insurance services, healthcare and housing collectively contribute to 30 per cent of the discrepancy.

Bottom-up approach

Morgan Stanley, while admitting some limitations, claims its bottom-up approach tries to be comprehensive with all household consumption-related activities and cross-checks with multiple data sources and industry research conducted by the bank.

Findings from its bottom up work indicate that all five of the categories mentioned above registered rapid growth as household consumptions underwent rapid structural changes.

“These [sectors] have grown rapidly, so there has been an accumulating error, which we estimate amounted to $1.6 trillion in 2012 (suggesting an adjusted household consumption / GDP ratio of 46 per cent),” the bank said.