Last week, China released its historical GDP revision results, showing that real growth in 2004 was 10.1% instead of 9.5% and annual growth from 1979 to 2004 averaged 9.6% or 0.2% higher than originally estimated. Additionally, China also recently announced the 2004 census results that boosted the GDP estimate explosively by 16.8%. It not only paints a more accurate and comprehensive picture of China's economy, but also has certain implications to Hong Kong's developments.
The Perfecting of the Statistical System
The revised historical GDP after 1993 since the last census is deemed necessary to ensure the comparability of the historical data. The 2004 census found that the economy was significantly underestimated. While it is an important achievement of China's efforts to perfect its statistical system, it is by no means mission accomplished.
China compiles GDP data based on production, expenditure, and provincial methodology. The latest census is production based with the focus squarely on the secondary and tertiary industries, aiming to paint a more accurate and comprehensive picture of them. 92.6% of GDP revision came from the tertiary industry. With respect to the discrepancies that used to plague the national GDP and the sum of provincial GDP, the census successfully addresses them, narrowing the gap within acceptable statistical errors. As the National Bureau of Statistics puts it, 19 provinces have their GDP revised upward while the other 12 revised downward as a result.
Nevertheless, the research community hopes for more, such as the revision of the nominal as well as real expenditure based GDP and its breakdowns in order to better gauge the contributions from different sectors. Before the census, China's expenditure based nominal GDP for 2004 was RMB14.2394 trillion, 4.0% higher than the production based GDP of RMB13.6876 trillion. The revision boosts the latter to RMB15.9878 trillion, on 12.3% higher than the former. Therefore, the expenditure based GDP should and will be revised upward as well. At the moment, one can only guess how the five components of private consumption expenditure, government consumption expenditure, fixed capital formation, inventory and net exports will fare then. The same goes for real GDP as well. Meanwhile, using the fixed asset investment statistics and trade numbers as the numerator and the revised GDP as the denominator, one can arrive at smaller investment and trade dependency ratios, suggesting less serious problems. But if the gross fixed capital formation and net exports are revised upward along with the expenditure based GDP, there is no telling what would happen to these ratios. In view of these, the achievements made thus far are not yet of conclusive nature.
Currently, China only releases growth indices for the expenditure based GDP on constant price, as opposed to the breakdowns desired by the research community, making it difficult to gauge the contributions of the various sectors even though it can still be deducted indirectly. Obviously, more work still needs to be done for further perfection.
Important Features of the Historical GDP Revision
There are several aspects of China's historical GDP revision that are worth mentioning.
Firstly, although the Chinese economy was found to be 16.8% larger than originally estimated in 2004, the extra amount was evenly distributed to previous years through historical revision. As a result, comparability was achieved without causing great volatility in the annual growth rate. For example, the annual average growth rate between 1993 and 2004 was revised upward from 9.4% to 9.9%, as a result of the 0.0-0.8% upgrades of the annual growth throughout those years. Not only does the economy become larger, but it also grow faster. Starting from 2002, a year ahead of the original estimate, China has been conquering the 9.0% growth barrier. Yet policy makers are wary of hastening their judgment on the rationality of growth based on the new found data.
The revision showed it uos the higher than expected growth of the tertiary industry that boosted the overall economic growth, demonstrating its importance in both the absolute and incremental terms. The exaggerations of the primary and secondary industries are corrected to arrive at a more accurate tertiary industry figure. Based on the revised figures, the proportion of the tertiary industry to the overall economy has grown from 33.9% in 1993 to 40.7% in 2004, an increase of 6.8 percentage points. Meanwhile, the proportions of the primary and secondary industries decreased 6.4 and 0.4 percentage points respectively. This suggests that during the last decade, the Chinese economy has shifted from agriculture instead of industry to service. Therefore, China's industrialization process remains intact and the development of its service sector is still in the early stage.
Hong Kong: Implications of Total Value
At the first glance, China's GDP revision has little to do with Hong Kong, let alone it being about historical data. But just as it has implications to China's macro and industrial policies, Hong Kong can draw some revelations about its own development strategy as well. The first of all is about total value.
Hong Kong can let go the burden of maintaining its advantages in absolute terms over China when assessing the development gap and its own future. China is bound to overtake Hong Kong in absolute sense in every economic sector sooner or later. Based on international best practice, Hong Kong's statistics are rather accurate, with limited scope for revision. Additionally, if RMB continues to appreciate over time, China's GDP could rise further in US dollar terms. As for Hong Kong, the Currency Board System dictates that the gains from exchange rate effects are minimal.
Take Guangdong for example, its nominal GDP according to unrevised statistics was RMB1.6039 trillion or 17.2% higher than Hong Kong's using the exchange rate of RMB1.06 to HKD1. After the revision, Guangdong's economy shot up 17.6% to RMB1.8865 trillion, a stunning 37.9% larger than Hong Kong. Such a huge gap should guide Hong Kong's attitude in the cross border economic cooperation. The real advantages enjoyed by Hong Kong, if any, are of comparative nature, and the trend shows the development gap is narrowing. Therefore, we must actively seek more cooperation, leveraging Hong Kong's vast market network and advantages in services industry to serve Guangdong's industrialization process and service upgrades. Being the largest province in China in economic terms, Guangdong, still regards Hong Kong as the leader in cross border cooperation, which stems from the recognition of our comparative advantages. Even so, Hong Kong should not indulge in the narrow advantages it holds and becomes overly complacent. Another good example is our container port leadership position. Ports in Shenzhen and Shanghai are destined to overtake Hong Kong in total throughput. Hong Kong should have a sense of urgency in planning to maintain its leadership in the logistics and transportation sectors, and reexamine the priority of maintaining its absolute advantages.
Hong Kong: Implications of Growth
Shifting efforts to maintain sustainable growth seems to be the right answer for Hong Kong. Located right by an economy that is vastly larger than originally estimated, Hong Kong should focus on finding ways to share the fruits of China's rapid economic growth in order to achieve our own sustainable development. With Hong Kong's growth rate unchanged while China's uplifted, our participation seems to be less successful, which should be the key to future success.
The loss of edge in total value could turn out to be opportunities to growth because it implies larger economic hinterland and more business potentials. Hong Kong should in turn address the challenges of how to better serve this economic hinterland, reinvest some of the proceeds back to Hong Kong to support local economic activities, growth, employment and government revenues, etc. Thus, benchmarking Hong Kong's growth to China's could be a feasible method of planning.
A good example of the bilateral growth relationship is trade. In 2005, net exports of goods were the single most powerful source of growth. Hong Kong has registered double digit growth in trade for the second consecutive year on the back of strong trade performance of China. This is because 90% of our exports are actually re-exports, with the majority made up of goods to or from China. This demonstrates the success of Hong Kong in sharing China's trade growth. In the future, the advantage not only needs to be maintained, but should also be introduced to other sectors as well. Only by doing this can Hong Kong maintain 4.0% or so healthy growth in the medium to long run.
Hong Kong: Implications of the Service Sector
Now that the new data show China's service sector is stronger than originally estimated, benefiting from its migration from agriculture industry, what are the implications to the service-oriented economy of Hong Kong? In recent years, there have been concerns about hollowing out of our service sector, just like our manufacturing sector when they relocated to China. But as suggested by the data, China's service sector is still in the early stage of development, trying to close the gap between developed economies. In addition, because of the migration from agriculture industry, industries such as transportation, storage, telecommunication, wholesale and retail trade, eateries, real estates, finance and insurance, etc, have grown the most. In these sectors, Hong Kong still enjoys clear advantages due to historical and structural reasons. With the full support by the central government, as stated in the Eleventh Five Year Plan, Hong Kong should be able to maintain its long term competitiveness. Only when China's economy begins to migrate from industry to service sector will the scale tips more to the competition side away from the cooperation side of the service sectors of the two economies.
It is worth bringing CEPA into the argument. Starting this year, the implementation of CEPA III will give all Hong Kong origin products zero tariffs treatment when they enter the Mainland market, which should serve to revitalize Hong Kong's manufacturing industry. Moreover, on the service sector front, entry barriers are lowered further and more fields are opened up, creating a platform for Hong Kong services providers to enter the Mainland market and share the growth. The right direction has been set for Hong Kong to service Mainland's growth. However, Hong Kong needs to avoid the potential hollowing out effect. Transformation and innovation hold the key to retain the highest value added services in Hong Kong to justify our high land, rent and wage costs. Using Hong Kong as a base to provide quality offshore services to the Mainland, just like the IPO services, instead of moving all the services across the border seems to be the right direction of our efforts.
