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The author would like to thank, without implicating, Li Cui and Steve Dunaway for long discussions on this topic and Ray Brooks and Steve Barnett for helping to understand the intricacies of China’s national account data.
In this section of the paper, all ratios to GDP are computed in nominal terms and expressed in percent of expenditure-side GDP.
Much of this section draws upon the work done by Ray Brooks and Steve Barnett in estimating China’s GDP from the expenditure side (see Barnett and Brooks, What is Driving Investment in China?, IMF Working Paper 06/265). The author is thankful to them for sharing their data.
In practice, the NBS used the benchmark derived from the 2004 census to revise nominal GDP back to 1992 by applying the “trend deviation” method. The method, used by many OECD countries, involved calculating the deviation from the trend over 1992-2004 in the original data, and applying this annual deviation to the new trend for 1992-2004 based on the revised 2004 data. The calculation was done by the NBS for a number of sub-sectors and aggregate GDP was derived as the sum of the parts.
Private consumption is not adjusted for government spending on education and health, although these are essentially private goods, as the amounts are small (less than 3 percent of GDP in 2004) and because it is difficult to find reliable data on them in the 1980s. In general, spending on education and health by the state was not high even in the 1980s as much of spending was carried out by state-owned enterprises (SOEs) before the reforms of the mid- and late 1990s and data on spending by these enterprises are not available.
See Data of Gross Domestic Products (1996-2002). In addition, data for inventories are only published up to 1999.
Interestingly, studies that have estimated production functions directly for China such as Chow (1993), Chow and Li (2002), and Heytens and Zebregs (2002), have found similar values for capital’s share in national income.
In this paper, data from the Penn tables were not used for two main reasons. First, China has not directly participated in the ICP exercise and second the latest data is only up to 2000. In addition, this paper does not focus on cross-country comparisons such that the usefulness of comparable inter-country data is not obvious. Others have also attempted to derive capital stock measures for China, such as by Chow (1993), Chow and Li (2002), and Heytens and Zebregs (2002). The capital-output ratios reported there are exceptionally high, at around between 3.5 to 4.2, for China’s state of development in 1979. More recent studies, such as in Scheibe (2003) derive the capita-output ratio similar to the ratio used in this paper.
As an aside, some authors such as Maddison (1998) have argued that China’s national account statistics includes military goods in investment. To correct for this, he allocated 7 percent of investment to government consumption. We do not make any such adjustment since it is difficult ascertain the extent of this problem.
The rate is somewhat higher around 9-10 percent on capital income net of depreciation. Note that these are the average effective tax rates, and not the marginal tax rates. Given the lack of adequate information, it is difficult to compute the marginal rate. In addition, data on capital income tax is available only from 1992 as published in the Chinese Statistical Yearbook, prior to this period separate income tax data is not available.
Household savings for the period before 1992 are discussed in Kraay (2000), which showed a steady decline of the household savings to GNP between 1983 and 1995. The exact magnitude of the components of overall savings, i.e., savings by households, enterprises, and the government are difficult to disentangle, but estimates suggest that households save about 16-18 percent of GDP, while enterprises around 18-22 percent of GDP, and government between 6-10 percent of GDP (estimates by Kuijs (2005) and Chamon and Prasad (2005) are broadly similar).
The World Bank survey taken in 1999 showed that 80 percent of private firms face financial constraints in China, and Chinese firms’ reliance on retained earnings is higher than in other countries.
In simulating the impact of such reforms, it was assumed that financial sector restructuring cuts the gross wedge on capital income from its 2004 level to zero, such that by 2010 the net tax on capital income reaches the average effective rate of the 1990s and 2000s, i.e., around 6 percent and remains at that level thereafter. All the other parameters remain unchanged.