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We disagree with claims that GDP growth in 2019 is overstated, which cite the disparity with income growth, explained Wei Li and Hunter Chan – Economist at Standard Chartered Bank.

Key Quotes:

“Some market participants believe China’s 2019 GDP growth has been overstated, citing the rising discrepancy between GDP growth and income growth. Nominal GDP grew 7.9% y/y in the first three quarters of 2019, while average income growth – measured by urban household disposable income, industrial profits and government tax revenues – was only 2.1% y/y, a discrepancy of 5.8ppt. In theory, these two growth rates should be equal.”

“We estimate a discrepancy of 2.1ppt between GDP growth and income growth in the first three quarters of 2019, based on our preferred income indicators. This is within the historical range of 0.1-2.3ppt from 2013-17.”

“Faster GDP growth by production than by income, in our view, reflects rising downward pressure on China’s economy since the beginning of 2019. “

“We prefer using industrial sales revenues rather than industrial profits to measure company income across all industries (hereafter referred to as ‘all company income’), partly because the industrial sector’s share of GDP has fallen, to 34% in 2018 from 41% in 2008. On the other hand, the share of the services industry rose from 43% to 52% over the same period.”

“The government’s primary income from production taxes is only 14% of GDP, limiting the impact of falling tax revenues on calculating GDP growth.”