# **Annex: Methodology used in the estimations**

# **_Definition of sectors_**

The analysis of capital formation here covers four sectors: businesses, infrastructure, government and housing. National accounts in China distinguish a government sector and a sector that covers nonfinancial enterprises. It is appealing, but incorrect to use the non-financial corporate sector as a proxy for the business sector. It is wrong because there are three sub-sets of firms in the non-financial sector, a private sector and two sets of which are controlled by the government. Of these two, there are enterprises, across all sectors of the economy, that operate commercially and often have minority shareholders from the private sector but which take into account government policies as well as returns to shareholders. In addition, there is a second group of state-owned companies that provide public services and infrastructure, some of which are known as local government financing vehicles or urban development corporations. These companies rely on subsidies from the government to continue their operations. Under the newer versions of the SNA, such companies should be classed as being part of the government sector, but in the Chinese practice they are still classified as being in the non-financial corporate sector. Moreover, businesses run by their owners are included in the household sector of the economy. As a result, the non-financial sector of the national accounts cannot be used as a proxy for the business sector. Rather, the analysis in this paper is based on an allocation of the economic sectors, as defined in the most recent Chinese Industrial Classification to sectors covering businesses, infrastructure, government and housing. Thus, the sector definition of government here is narrower than the normal definition of general government. Wholly government financed highways, for example, would be allocated to the infrastructure sector. The precise definitions are set out in Table A1.

The definition of infrastructure in this paper is narrow and focusses on services that are provided on a non-commercial basis. Thus, electricity and telecommunications are allocated to the business sector rather than to infrastructure. They are provided on a commercial basis in China, with most of the value-added being created by firms that are listed on either the Shanghai or Hong Kong SAR, China, stock exchanges. On the other hand, railways, toll highways, urban and environmental services are allocated to infrastructure. Enterprises in these are generally publicly-owned and not generally required to cover their full cost of capital. The allocation of industries to the four sectors also has to take into account that data are only available at a high level of aggregation. This leads to some sectors, such as air transport and storage, being allocated to infrastructure rather than to the business sector.

The definition of the government sector used here is also relatively wide in that it includes all scientific research, cultural activities and the activities of non-governmental organizations (NGOs). In the case of cultural and entertainment, this reflects government control of the bulk of these activities. The apparently paradoxical inclusion of NGOs in the government sector is merely a reflection of the Chinese Industrial Classification rather than a statement on the independence of NGOs.

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