China's Revised GDP Accounting Methodology to Include R&D Expenditure as Fixed Investment

A new GDP accounting methodology that is expected to be implemented by China in 2015 would require the inclusion of R&D expenditure in GDP calculations and stock options as employee compensation, according to a report by Bank of America Merrill Lynch.

Under the current system, R&D expenditure is considered as “intermediate consumption” and not included in the calculation of final GDP.

The preliminary draft of a new GDP accounting methodology was recently completed by China's National Bureau of Statistics. This draft will be submitted to the State Council for approval later this year and is expected to be implemented in 2015.

In 2013, R&D expenditure was at 2.0% of GDP. BoFAML estimates that including R&D will add 2.1% to the nominal GDP level and less than 0.1pp to nominal GDP growth in 2014.

"However, the actual impact on nominal GDP could be smaller considering less than the full amount of R&D expenditure will be added to GDP," said Ting Lu and Sylvia Sheng, chief economists at Merrill Lynch (Hong Kong). "Thus, we expect minimal impact on real GDP growth after taking into account of inflation."

The proposed revision mainly reflects the updated international guidelines for national economic account in the 2008 UN System of National Accounts (SNA).

A number of countries such as the US, Australia, Canada and Korea have already implemented the changes.

The NBS also proposes the adotpion of a rent-based approach to estimate the services provided by owner-occupied housing.

Currently, NBS uses a cost-based method to calculate the imputed rent of owner-occupied housing by adding depreciation of housing capital to maintenance and management costs.

The NBS is also pushing for the actual final consumption of households. The NBS currently measures household consumption using household final consumption expenditure. The main difference between household final consumption expenditure and actual final consumption of households is that the latter takes into account goods and services provided by the general government such as education and health services.

Another proposal is the recognition of income resulting from the transfer of land contract and management rights.

According to China’s constitution, land in rural areas is collectively owned. However, based on the principle of economic ownership, farmers who obtained the contract and management rights are the economic owners of the land.

Therefore, income received by the farmers from transferring the contract and management right to other individuals and/or institutions constitute households income. This will account for a significant proportion of some farmer’s income.

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