China households elude taxman – and official GDP bean-counters

China households elude taxman – and official GDP bean-counters
Wed, Jan 22 2014
By Koh Gui Qing

BEIJING, Jan 23 (Reuters) – China’s famously frugal households may be living larger than they are letting on.
Economists have long warned that China needs to pump up domestic spending to offset an over-reliance on credit-fuelled investment and exports for growth, and in their latest blueprint for reform China’s leaders have vowed to do just that.
Data released this week showing China’s economy grew 7.7 percent last year suggested the imbalance is worsening, with consumption unchanged at just under 50 percent of GDP, but investment growing to slightly more than half.
A growing number of economists, however, say official statistics have got it wrong. To avoid taxes, consumers routinely get employers to buy things for them, resulting in a gross underestimation of how much consumers spend and exaggerating just how lopsided China’s $9.4 trillion economy is.
“China’s consumption is not low,” said Zhu Tian, an economist at the China Europe International Business School in Shanghai, who co-authored a recent report on the subject. “It’s actually desirable,” he said.
Government estimates put household spending at roughly 36 percent of GDP, the result of a long decline from 49 percent in 1978. Household consumption in Thailand, which is slightly poorer than China in terms of GDP per citizen, is 56 percent of GDP, according to the World Bank. In the United States, households spend the equivalent of 69 percent of GDP.
But Zhu and other economists say government estimates overlook trillions of yuan in hidden household spending, particularly among China’s increasingly affluent middle class. Add that and household spending amounts to about half of GDP, and more than 60 percent when combined with government spending, according to Zhu’s study, which was published in September with Zhang Jun from Fudan University’s China Center for Economic Studies.
The implications are far-reaching, at least statistically. If Zhu and Zhang are right, not only do consumers represent a larger part of China’s economy than thought, but estimates of China’s vaunted household savings rates may be inflated, investment’s dominance may be overstated and China’s economy may be larger than current estimates.
The government may also be due a lot of income tax.
Zhu and Zhang go even further, saying that their findings challenge the notion that consumption is inadequate, a problem analysts and policymakers, including the World Bank, have blamed on inadequate social safety nets such as unemployment and health insurance.
REFLEXOLOGY AND SING-ALONGS
Collecting data on consumption is challenging in any developing country because so many of the things people buy are informal services not captured by tax authorities, such as foot massages, karaoke sessions or food from street vendors.
“All of these issues with statistics are common to fast-growing economies,” said Bert Hofman, chief economist for East Asia and the Pacific at the World Bank in Singapore.
China’s statistics have drawn their fair share of brickbats from economists, who have resorted to a host of exotic alternatives – from consumption of salt to sales of imported Audis – to gauge the true health of the second-largest economy.
China’s National Bureau of Statistics declined to comment, though it has in the past conceded it may be underestimating consumption. It plans to revise the way it calculates GDP as early as this year.
“After the correction,” said Hofman, “China will look a lot more normal – more balanced, some would say.”
In the meantime, economists say poor data collection paints an excessively bleak picture of consumption. One problem is sample size: China’s statisticians base their estimates of household spending in this nation of 1.35 billion people, or 402 million households, on surveys of just 100,000 households.
Then there is the way they add up expenditures. Take housing costs. China tallies data on how much households pay in rent, but uses outdated values to calculate the value of housing to home owners.
PERQUISITE REPUBLIC
But the list does not end at rent. To compensate for lower wages, companies in China routinely lavish employees with gifts ranging from mobile phones and household appliances to luxury cars and vacations.
“This happens all the time, and of course it is not the right way,” said Helen Qiao, an economist at Morgan Stanley in Hong Kong.
By taking part of their pay in undeclared perks, employees lower their taxable income and companies reduce their taxable profits. Perks are particularly popular among those Chinese with the biggest tax liabilities – its wealthy.
And while these items are for personal use, once a company pays for them instead of a private household, the expense is classified as a business cost and left out of consumption and GDP.
Omissions like that missed 7 trillion yuan ($1.2 trillion) worth of household spending in 2009, Zhu and Zhang estimate in their report. Morgan Stanley’s economists calculated last year that government statisticians missed roughly $1.6 trillion in spending in 2012, meaning household consumption was actually equivalent to 46 percent of GDP.
But even at 50 percent of GDP, China still needs to get households to consume more domestic services if it wants to create a viable and growing middle class, said Kevin Lai, an economist at Daiwa Securities in Hong Kong.
“You can forever keep investing in new capacity, but where is the demand?” Lai said. “At the end of the day, you need to find demand to feed that capacity.”
To Zhu, however, China’s consumption levels are already healthy; it is Beijing’s emphasis on boosting consumption that needs re-examination.
“All the talk about China investing too much and consuming too little is meaningless,” he said. “The focus of change should be on improving equity and the efficiency of investment, not stimulating consumption.”