Industrial Value Added – How its calculated and why its important

Also known as GDP-by-industry, is the contribution of private industry or government sector to overall GDP. Compiled by the NBS on a monthly basis it measures the difference between an industry’s gross output and the cost of its intermediate inputs. It is broken down by ownership type, sector, and product.

Def: gross output – Consisting of sales or receipts and other operating income, commodity taxes, and inventory change

Def: intermediate inputs – Including energy, raw materials, semi-finished goods, and services that are purchased from all sources

This is important because the Chinese economy is highly dependent on industry. Although there has been much talk of attempting to rebalance the economy more toward services, industry now accounts for a higher percentage of GDP than ten years ago. Industrial value-added accounts for around half of total GDP, and employs manufacturing employs almost a quarter of a billion people, almost a thirty percent of the workforce.

Given the rapid development of the manufacturing sector in China, the NBS has had to revise the way this figure is calculated many times attempting to balance the cost of collecting the data against the reliability of the figure. In 2011, the NBS decided the figure should reflect all firms in the manufacturing sector with operating revenue above 20mn CNY a year. The largest 40,000 companies that account for 60 percent of output report their figures directly to the NBS, the rest is collected by local statistical offices which opens the door for distortion and political manipulation.

An additional level of error is present in the way the NBS needs to use estimates to calculate the data in a timely fashion. As industrial added value is the difference between total value of production minus the intermediate inputs, the NBS uses the previous year’s average ratio of input to output rather than attempting to calculate the cost of inputs directly. The second estimate introduced into the equation is the purchasing price index that the NBS uses get from the nominal figure to the real figure – effectively using it to take account for inflation.

In many ways this figure acts as a barometer for the state of the economy at large as it reflects changes in the sector most sensitive to economic changes. As factories can rapidly increase and decrease production it provides a valuable insight to the industrial impact of changes in government policy, demand and interest rates.  

As such it impacts equity markets that expect profits to rise or fall, commodity markets that supply the inputs to Chinese industry and currency markets, in particular the currencies in which China buys its imports and proxies for the CNY.