In the international innovation race, the digital sector has probably been China’s showcase. The rise of influential Chinese digital giants, including Baidu, Alibaba, Tencent and Xiaomi (known together by the acronym BATX), have shown the world that China is thriving to be a global leader in digital innovation. Beyond its domestic market, international statistics clearly points to China’s leading role in exporting digital goods and services. Given that China is densely populated with a fast-growing economy, it is not surprising that China has started to influence the global digital market. But has China exploited its full potential in this area?

The importance of the question, at international level, is reflected by the prominence of the digital economy in G20 meetings and other international forums, and by the ongoing work by the OrganizationOrganisation for Economic Cooperation and Development (OECD), the International Monetary Fund and other international institutions. At the national level, the Chinese government, through its statistical agency, the National Bureau of Statistics (NBS), has embarked on a bold project to measure China's new economy, including its digital economy. While no official measure of its digital economy has been released so far, the NBS has reported a Digital Economy index as a subsection of a broader self-defined New Economy index. This index, though narrow, points to very rapid growth, in line with another similar index compiled by a private company.

However, a review of current practices in the measurement of the digital economy at the international level shows that, no comparison has been really made so far using the OECD standardized measures of digital economy, apart from measuring Chinese trade in digital goods and services. But the reality is that, because China has been a very important world exporting power, estimating the digital economy from trade perspective tends to overestimate its size relative to the other activities.

To fill that gap, we have developed an internationally comparable estimate of the size of China's digital economy, understood as the size of the information and communication technology (ICT) sector. Specifically, we use China's input-output (IO) table and China's Population Census Data at a granular sectoral level to quantify how much China's ICT sector contributes to China's total value-added goods and employment. While the data sources are different from the OECD in terms of definition and statistical classification, we propose a method to match the economic activity classifications from the International Standard Industrial Classification of All Economic Activities (ISIC) with Chinese classifications, and use a similar definition of the ICT sector to replicate the OECD methodology in the case of China.

Our results show that, in contrast to the export measures, both China's value-added (4.8 percent) and employment (2.6 percent) share in the ICT sector are lower than the OECD average (6 percent and 3.7 percent, respectively), and are far behind Japan. The result is consistent with the OECD's estimate of China's domestic value-added embedded in exports, whose share in global market is significantly lower than its share of gross exports. In other words, China seems, according to our estimates, to produce more ICT products, but the value-added and employment invested in the digital economy is less.

Another feature of China's digital sector is its concentration on manufacturing activities. Manufacturing production of goods such as electronics, computers and telecommunication devices, amounts to about 55 percent of total value added in China's ICT sector. In turn, service activities only contribute 45 percent of total value added in the ICT sector. This implies that China's digital economy is still deeply rooted in manufacturing. Moving forward, China's transition towards a more service-oriented economy should also push ICT services further.

While relevant for their comparability with other countries, these results should be treated with caution because the available Chinese data is somewhat dated and limited (IO table only for 2012 and population census only for 2010) and the digital economy has developed very rapidly in the last few years. This, however, is also the case for comparable data from other countries, so the question remains if China's digital economy has developed much faster than the digital economies of other countries in the past few years.

To at least partly address the issue, we use the official value-added growth rate information for ICT manufacturing firms to estimate the ICT value added after 2012. Notwithstanding our conclusion that the size of China’s ICT sector has increased significantly (Figure 14) to reach 5.6 percent of the total value added in 2016, and the gap between China and the OECD in terms of the size of the digital economy is narrowing,   China remains below the OECD average in this respect for now.

Having said that, the development of the digital economy in China might lag the OECD average, the key importance for China of the digital sector should not be understated. First, China is a developing country with dual characteristics: it still has a large proportion inof rural employment, which cannot be absorbed into the digital sector. If the current urbanization process is sustained,sustains, China's digital economy should continue to increase.

Second, laborlabour productivity in the digital sector relative to the nationalcountry average is higher in China than in OECD countries, meaning that the digital sector is driving the Chinese economy to a greater extent than in other countries. Specially, the laborlabour productivity in the Chinese ICT sector is about 1.8 times greater than China's average laborlabour productivity, whereas laborlabour productivity in the digital sector in the OECD is only 1.6 times higher than the average.

Third, the distribution of digital development is uneven across different regions in China. In terms of ICT's employment share, leading cities such as Beijing, Shanghai and Guangzhou, have already shown very high ratios – 8.4 percent, 8.2 percent and 7.9 percent, respectively – exceeding nearly all major OECD countries. However, ICT employment shares in the much less developed regions such as Tibet and Guizhou are less than 0.1 percent.

All in all, our measurements indicate that China's digital economy is not bigger relative to the size of the Chinese economy when compared to the OECD average, especially in terms of ICT employment. However, the national results should not be read negatively, as it is affected by China's low urbanization rate and uneven distribution across regions. More importantly, because of the relatively high laborlabour productivity of the digital sectors versus to the other activities, the sector should be expected to continue to lead China's economic growth. The current low profile of our measurement only means that China has not fully exploited its capacity in the development of digital economy.

The author is Senior Economist for Natixis, Non-resident Fellow at Bruegel, and Associate Professor at Beijing Normal University.

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