The National Bureau of Statistics recently announced a revision to China's 2004 GDP, the result of findings from the latest National Economic Census. According to the latest data, GDP was found to be more than 17% higher in that year than previously reported. In addition, historical values of GDP have been subsequently revised in order to maintain historical comparability of the data.

As a result of these revisions, China’s GDP has been changed not only by level, but also by composition. The revised GDP reflects a much greater contribution by the service sector to the country's overall output. In fact nearly all—approximately 93%—of the net increase is attributed to services. The goods sectors (the agricultural, mining, and manufacturing sectors, along with utilities) accounted for the remainder of the increase, while the construction sector's contribution decreased slightly.

Commissioner Li Deshui of the National Bureau of Statistics (NSB) pointed to several factors that led to the earlier underestimation of the services sector, including the outdated national statistical system that was previously used, as well as the wide and complex scope of the service sector. China had been previously using the material product system (MPS) of national accounts, which was developed under the centrally planned economic system. The system was intended to measure manufacturing production, and as such is inadequate in measuring services output. Moreover, the service sector is highly fragmented and encompasses many small private enterprises. This complexity hinders an accurate accounting of all transactions; also, transactions at such businesses as restaurants and grocery stores are usually made in cash. Finally, private businesses are more inclined to under-report earnings in order to avoid taxes.

The First National Tertiary Industry Census was conducted in 1992, and resulted in revised historical GDP data from 1978 to 1992. Most recently, the NSB conducted the census using the trend deviation method accepted by OECD. As a result, GDP was re-estimated back to 1993 to maintain the historical comparability of the GDP data. The revised GDP data now show an average increase in growth of 1.5 percentage points per year, from an average of 11.1% to a revised 12.6% during 1993 to 2004; compounded annually, this results in a 17% increase for 2004.

Before the revision, output in China's services sector was reported as growing an average 10.2% per year. The re-estimation now reflects an average of 3.9-percentage-point faster growth annually, raising overall services output growth to 14.1% per year. The acceleration of growth from 1993 to 2004 results in a 51.3% increase in the value-added level for that sector. The mining, manufacturing, and agriculture sectors were only slightly revised, from average growth of 10.9% to 11.2%, an increase of 0.3 percentage point per year. The utilities sector saw a similarly modest increase. Finally, the construction sector, which is primarily state-run, saw an actual decrease in its growth rates.

The census data found occurrences of state-run enterprises, including township enterprises, exaggerating their output figures to help local governments and officials showcase their political achievements and seek promotion. Indeed, it can be concluded that the upward revision to China’s GDP was largely driven by a more accurate accounting of the expanding private sector, which happens to be based heavily within the service industries.

This is confirmed by Li, who noted that the three sectors—transport, storage, post and communications; wholesale, retail, and catering trade; and real estate—where private and individual ownership has taken a large share account for 70% of the total increase in value-added of the tertiary (service) industry.

After this revision, China’s service sector accounted for 40% of total GDP in 2004, versus the previously reported 31%. Although this represents a significant increase, the services share is still well below the 60-75% typical in well-developed countries.

As the Chinese economy continues to grow and mature, the service sector will certainly expand further to play an even greater role, driven in part by a burgeoning private sector. The recent GDP revision not only provides a better picture of the larger contribution of the service sector to China's overall economy, but it also provides a better framework from which to forecast future growth.