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China's broken counting rods?

By: Mat Lystra, Sr. Research Analyst

China developed one of the earliest systems of mathematics, using rods arranged in specific directions to count in 1s and 10s. This simple but effective method allowed for advancements in the measurement of trade, farming output and other government interests.[1]

As people look for reasons to explain the latest bout of volatility in China’s equity market, many have wondered aloud if the modern equivalents of those ancient rods have been broken, yielding data about the Chinese economy that is flawed.[2] And what might that mean for users of China indexes in particular?

Metal counting rods from the period of the Han DynastySource:

If you’re among those that believe China is somehow getting its notorious 7% GDP growth figure wrong, there’s probably little any blog post can do to change your mind.  But whether someone is using 3000 year old ivory counting rods, or present-day computing systems, accounting for the national output of an economy the size of China’s is surely a challenging and imprecise task. Consider that even GDP figures for the US and other advanced economies are often revised multiple times over months and years before they are considered “final”.

In addition to GDP-related figures, China’s National Bureau of Statistics produces a series of purchasing manager’s indexes (PMI) that are split between manufacturing and non-manufacturing related activities. The top-line manufacturing and non-manufacturing PMI figures can be used as a check against reported GDP growth. If the data series (GDP growth and PMI activity) are consistent, then perhaps China’s GDP numbers are a fair representation of the how the country’s economy is performing.

As shown below, the PMI data for 2015 paints a mixed picture of manufacturing decline partially offset by growth for non-manufacturing activities. China reported that the services sector, the non-manufacturing portion of the economy, contributed to half of GDP in 2015 – a first for the country.[3] Equally weighting the performance of both PMI measures points to a dip in activity that is directionally consistent with modest declines in GDP growth.

One-year change for China’s Economic Indicators
Source: National Bureau of Statistics, December 2015.  *Difference in YoY GDP Growth rate

GDP has become important not just to economists and politicians, but to index users as well. A derivative of GDP, Gross National Income (GNI) per capita, is used as an input to FTSE Russell’s Country Classification System. Additionally, some index users prefer to weight countries based on their economic footprint instead of their equity market size. Often a developing country’s economic growth can outpace its market value growth, leading to a disproportionately small representation within traditional cap weighted benchmarks. 

In order to “right-size” these countries, some index users will choose a GDP weighted structure like that offered through the FTSE GDP Weighted Index Series. This series breaks the conventional link between country weightings and equity market size. In the case of China, according to the IMF the country has a GDP of approximately $19T, but a total market size of only about $3T; as compared to the US with a GDP of approaching $18T but a total market size of approximately $25T![4] 

So whether you believe China’s economy is experiencing a soft landing or full-blown stall, FTSE’s GDP Weighted Indexes would suggest there’s still plenty of room for the country to grow when compared to its weighting within cap weighted indexes.


[1] Calvert, J.B. (2000).  Chinese Numbers. University of Denver webpage page retrieved at:

[2] Cendrowski, S. (2016).  China’s Real GDP Growth Figure is Less Than 6.9%.  Fortune accessed on 1/22/2016 at:

[3] Fraher, J. & Micklethwait, J. (2016). China to Remain Global Growth Engine, Vice President Li Says.  Bloomberg accessed on 1/22/2016 at:

[4] Source: International Monetary Fund’s 2014 World Economic Outlook report..


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