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 significantly undervalued 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 of official data which show consumption declining as a share of GDP over the past decade. Reason 1: The widening gap between consumption growth and retail sales growth likely implies that the growth rate of consumption has also been underestimated, 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 a share of GDP and retail sales of consumer goods. Barclays concludes that this should lead us to be skeptical of the official consumption statistics. However, when you take a closer look at whats included in the retail sales of consumer goods statistic, it becomes clear that relying on this as a proxy for consumer activity is problematic. The statistic combines the sales of both retailers and wholesalers. Moreover, sales are recorded by the point of sale, not the type of buyer. Thus businesses purchasing supplies from retail outlets will be included in this statistic. This is a significant problem for data accuracy given that private enterprises and self-employed individuals, the businesses most likely to purchase from retail outlets, have doubled over the past decade to 30 percent of urban employment. The employment share of state-owned enterprises, which are more likely to have their own supply networks, has fallen from 42 percent of urban employment to 19 percent. By itself, the discrepancy between retail sales of consumer goods and official statistics is not sufficient to discredit official household consumption statistics. Reason 2: According to one major study (Wang and Woo 2011), Chinas household income was underreported by 66% in 2008, which could be translated into underestimation of GDP by 10%. The underreported income was concentrated mainly in high-income households. The same study suggested that household consumption was probably underreported by 20% in the same year. Therefore according to the study, both total consumer spending and consumption share of GDP were underestimated. The Wang study critiques the National Bureau of Statistics (NBS) Household Survey, which is the basis of official consumption statistics. Wang creates an alternative estimate of income levels in the study. Barclays then uses these estimates to construct several alternative measurements of the consumption share of GDP, which range from moderately to significantly higher than the official level.

Should we be suspicious of Chinese consumption statistics? Certainly to some extent. See the appendix of Sustaining Chinas Economic Growth After the Global Financial Crisis for a detailed discussion on why official statistics underestimate housing services and therefore underestimate consumption as a share of GDP by a couple 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 youll quickly notice some problems. The Wang study asserts that the NBS household survey is flawed because many high-income residents were unwilling to participate in the study and those that did were reluctant to report their full income. In order to avoid this problem, the Wang study asks survey staff to only interview people 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 to directly extrapolate the general distribution of urban household income. Beyond not having a random sample, there are major methodological issues with this approach. Unlike the national household survey which requires participants to document in real time their consumption activities over a set period, the Wang survey is reported based off memory. Asking personal acquaintances tell you their incomes will undoubtedly result in errors. The Wang study asserts that these errors will be random and will average out with a large enough sample. This is an optimistic assumption, its quite possible that people will systematically distort there income when talking to someone they are familiar with. The data from participants is then analyzed using Engels coefficient to estimate actual levels of income. There are plenty of skeptics (Chinese language) when it comes to using Engels coefficient to estimate income in China. The Wang study adopts a modified Engels coefficient to account for some of the problems, but their method has been criticized (Chinese language) by the NBS for being insufficient in accounting for variability caused by factors other than income. Bottom line, any estimate that relies on a blatantly nonrandom sample composed of self-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 the official data on consumption, but this study by itself is not sufficiently rigorous to form the basis of new estimates. Overall, the two non-official measures of consumption endorsed by the Barclays report appear to be highly problematic and unsuitable as the basis for an alternative measurement of consumption.