Measuring the universe’s most important sector

TEN YEARS ago Chinese property was described as “the most important sector in the universe” by Jonathan Anderson, now of Emerging Advisors Group, a consultancy. Property was a big source of China’s growth, household spending and appetite for commodities, like iron ore. Today the sector has become a source of universal concern, as housing sales have dropped, developers have defaulted and the price of iron ore has tumbled. China-watchers are eager for a rigorous measure of the sector’s importance to the country’s economy. And in recent months, the world’s press has converged on a number: 29% of GDP.

That estimate, which has been cited in this newspaper, the Financial Times, the Wall Street Journal, Bloomberg and elsewhere, comes from a paper by Kenneth Rogoff of Harvard and Yuanchen Yang of the IMF. Both economists have impeccable credentials. But their number (28.7%, to be precise) does not count what most people think it counts. The most prominent measure of the most important sector in the universe is widely misunderstood. So how should it be interpreted? To grasp it properly requires a gentle walk through the ins and outs of inputs and outputs.