China is Going Grey

Maya Alexandri has written a superb review of a recent government study on China’s grey economy. The study claims that urban residents in China generate and earn an estimated RMB 4.4 trillion in grey income. Putting that number into perspective, that’s about the size of the current defense budget of the United States.

Let’s analyze those numbers for a moment. Figuring that China has approximately 300 million urban residents, that’s RMB 14,667 in underground spending/earnings PER urban resident each year. While US$ 1920 per year may not sound like a lot, it represents a figure that is 25% larger than what the National Bureau of Statistics reported for per-capita urban income in 2006.

This means that urban income is at least understated by 25% in government statistics, and if the NBS is not taking into account the grey economy (which it doesn’t look like they have,) urban incomes in China could well be underestimated by 50% or more.

In a day when there is a significant battle among economists as to exactly how much purchasing power China’s urban residents have, this discrepancy could be pivotal in the debate.