China’s financial sector put on necessary GDP diet

HONG KONG, July 11 (Reuters Breakingviews) – It’s usually a red flag whenever China’s bean counters “optimize” already questionable market indicators. But the recent tweak to how the country calculates what the financial sector contributes to the economy makes sense.

Many countries have struggled with how to measure the so-called value added of financial intermediaries — the value of goods or services produced minus the cost of inputs used in their production. Methods vary, but most, including U.S. authorities, generally use some form of earnings, which for banks basically boils down to fees, commissions and net interest income. The People’s Republic, however, focused on growth in loans and deposits — until it quietly shifted to profitability earlier this year.

The change was describedNew tab, opens new tab colorfully described by the central bank-owned Financial News as “squeezing water” from the numbers and “trimming the misleading fat” from the industry. In other words, basing the calculation primarily on growth in assets and liabilities was likely overstating the financial sector’s value added. Last year, that figure was 8 percent of national GDP, on par with the United States. At a local level, it could be much higher: Nanjing, for example, revealedNew Tab, opens new tab that the city’s financial sector accounted for 14% of GDP in the first three months of last year.Reuters GraphicsThe problem is that banks’ balance sheets can be easily manipulated to help officials meet their GDP growth targets. Some financial institutions, for example, would borrow interbank deposits from other regions, according toNew tab, opens new tab for a news report, only to return the funds after government data collectors did the math. Speaking at a financial forum in June, central bank Governor Pan Gongsheng said the value-added adjustment will discourage local governments and banks from inflating loan and deposit volumes during key assessment periods.

The revised calculation is already having an impact on some data. Total social financing, a broad measure of credit and liquidity in the economy, contracted month on month in April for the first time since 2005. Weak demand is to blame, but fewer incentives for banks to sustain lending and deposits likely accelerated the decline.

Making the change this year could reduce the financial sector’s contribution to the economy more than in recent years, given a earnings crisis unfolding in the banking sector. Broader pan message is that the central bank will prioritize credit allocation and efficiency over expansion. Refining the data is a sensible first step. Follow @mak_robynNew tab, open new tab in X

CONTEXT NEWS

The Chinese government will release second-quarter gross domestic product data on July 15.

China’s National Bureau of Statistics has “optimized and adjusted” the way it calculates the value the financial sector adds to the economy, Financial News, a publication owned by the People’s Bank of China, reported on May 13. The changes took effect in the first quarter of 2024.

Previously, quarterly value added, defined as the value of goods or services produced minus the cost of inputs used to produce them, was calculated primarily using banks’ deposit and loan growth. Instead, the NBS is now taking into account bank profits, including net interest income, net fees and commissions, the report said.

Separately, China’s central bank governor Pan Gongsheng told the Lujiazui Forum in Shanghai on June 19 that the PBOC has been working with the NBS to optimize financial sector accounting to better reflect the sector’s economic value added and discourage local governments and financial institutions from inflating loan and deposit volumes.

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Edited by Antony Currie and Aditya Srivastav

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Robyn Mak joined Reuters Breakingviews in 2013. Previously, she was a Research Associate for Global Policy Programs at the Asia Society in New York. She has also worked at the Carnegie Endowment for International Peace in Washington DC and interned at several consulting firms, including the Albright Stonebridge Group. She holds a master’s degree in international economics and international relations from the Johns Hopkins School of Advanced International Studies and graduated magna cum laude from New York University.

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