The Overview of GDP Estimates and Related Issues in China

1. The Overview of GDP Estimates and Related Issues in China Discussant comments Session: Recent Developments in the NBS (I) Tuesday, December 1, 2009 Kim Zieschang IMF Statistics Department The 13th OECD-NBS Workshop on National Accounts Haikou, China November 30-December 4, 2009 The views herein are those of the author and should not be attributed to the IMF, its Executive board, or its management

2. Institutional units versus activity units • NBS question 1: How can data on activity units be collected if sources provide information only on institutional units (i.e., enterprises rather than establishments) • Sample surveys of enterprises identifying the establishments they own? • Single physical location, producing one or a few types of output Discussion: Overview of GDP Estimates and Related Issues in China

3. Owner occupied housing services output • NBS question 2: How should depreciation be calculated for owner occupied housing? • Output is the aggregate depreciation of the owner occupied housing stock • Volume of output proportional to area of dwellings • Price index proportional to depreciation per unit area of dwellings Discussion: Overview of GDP Estimates and Related Issues in China

4. Owner occupied housing services output • Restatement: How should rentals be calculated for owner occupied housing? Two approaches • Rental equivalence • User cost of capital Discussion: Overview of GDP Estimates and Related Issues in China

5. Owner occupied housing services output • Rental equivalence • Equivalent rents for types of owner occupied units my be hard to find in a given market area, so, alternatively use • User cost of capital • Depreciation • Plus interest cost of invested funds • Minus expected appreciation in the prices of owner occupied dwellings Discussion: Overview of GDP Estimates and Related Issues in China

6. Owner occupied housing services output • User cost of capital, continued • If the user cost method is followed, using only depreciation is equivalent to saying that the interest cost of invested funds less expected appreciation (the real interest rate) is zero • Overstates current price output level if real interest rate is negative • Understates current price output level if real interest rate is positive • Overstates current price output growth if real interest rate is falling • Understates current price output growth if real interest rate is rising Discussion: Overview of GDP Estimates and Related Issues in China

7. Owner occupied housing services output • These are primarily housing price rather than volume effects • Output volume growth is fundamentally the weighted average increase in the aggregate area (size) of the housing stock, controlling for the mix of types of unit • It is important that housing stratified by type of unit • Weighting of growth in certain types of housing is important to the accuracy of the estimate of total volume growth in owner occupied housing services • The rental estimate is important to these weights whether by equivalent rent or user cost Discussion: Overview of GDP Estimates and Related Issues in China

8. Real estate development • NBS question 3: Financial statements of real estate development companies do not strictly reference activity from the current period, but also include activity from past periods • Have I got the problem correctly stated? • Further explanation of the problem with the data? Discussion: Overview of GDP Estimates and Related Issues in China

9. Some further observations: FISIM output at current prices • NBS approach to financial intermediation services indirectly measured (FISIM) • Loans: loan interest receivable – reference rate  annual average value of loans • Deposits: reference rate  annual average value of deposits – deposit interest payable • Reference rate = (deposit rate + loan rate – risk premium)/2 Discussion: Overview of GDP Estimates and Related Issues in China

10. Some further observations: FISIM output at current prices • Comment • Reasonable approach which allows the average term structure of loans relative to deposits to affect the allocation of FISIM between loans and deposits • Loan rate minus risk premium differs from deposit rate because of difference in maturity of loans versus maturity or duration of deposits, among other things • The risk premium stays in FISIM as compensation for risk bearing • Most of the risk bearing charge probably covers the equivalent value of insurance against term and loan default risk • The rest of the risk bearing charge is paid to the stockholders for bearing risk as a primary input service • The amount of the risk premium to be included in FISIM is currently under discussion in the ISWGNA as part of the 2008 SNA Research Agenda Discussion: Overview of GDP Estimates and Related Issues in China

11. Some further observations: FISIM output at current prices … so NBS loan FISIM fully reflects the risk premium because the reference rate is effectively risk free. Paragraph 6.166 of the 2008 SNA is somewhat ambiguous about whether risk is in or out of the reference rate. The 2008 SNA Research Agenda will aim to clarify this. Discussion: Overview of GDP Estimates and Related Issues in China

12. Some further observations: FISIM output at current prices • Questions • How is the loan risk premium estimated? • Should FISIM for loans be calculated on the market or fair value of loans rather than the contract value (which is the SNA’s valuation of loans on the balance sheet) Discussion: Overview of GDP Estimates and Related Issues in China

13. Some further observations: FISIM output price and volume • NBS FISIM price index: the unweighted average of the interest rate index for deposits maturing in 1 year and the interest rate index for loans maturing in 1 year • A “reference rate” index? • Weight of FISIM in NBS estimate of total financial services output is proportional to net interest receivable Discussion: Overview of GDP Estimates and Related Issues in China

14. Some further observations: FISIM output price and volume • Question: is this consistent with the current price value of FISIM? • Could average of index of the reference rate minus the deposit rate and index of the loan rate minus the reference rate be used instead of the average of indices of deposit and loan interest rates? • Could the weight of FISIM be FISIM rather than net interest receivable? • FISIM is close to net interest receivable on loans and deposits if total loans are close to total deposits, but the difference increases with total loans minus total deposits • Could interest rates and FISIM calculations for more maturities than one year be considered? Discussion: Overview of GDP Estimates and Related Issues in China

15. Some further observations: FISIM output price and volume • Question: Should the FISIM deflator not only depend on interest rates but also include either • Average deposit size and average loan size? • Implication: output is a weighted average of the number of deposit accounts and number of loan accounts • Or, a general price index, such as the consumption and capital formation deflator used for “other financial services?” Discussion: Overview of GDP Estimates and Related Issues in China

16. Some further observations: FISIM output price and volume Discussion: Overview of GDP Estimates and Related Issues in China

17. In closing • Thank you for the opportunity to learn about China’s national accounts and to offer some approaches to the methodological and data problems NBS faces in compiling them Discussion: Overview of GDP Estimates and Related Issues in China