Galbraith On China's Drastically Overstated Trade Surplus

Tyler Durden's picture

It is no secret that China's economic numbers are so cooked and unreliable, that they make the constantly changing and optimistically biased economic data out of the U.S. (especially lately) have the credibility equivalent of a Harvard Ph.D. thesis. University of Texas professor James Galbraith discusses one aspect of China's "booming" economy, specifically the question of China's Trade Surplus, which as he notes has been drastically inflated since 2002 due to Chinese companies over-reporting profits on exports in order to disguise various investments by foreigners into China, so as to beat capital control restrictions.

Galbraith argues the "fake profits" are so large that China may have actually ran a trade deficit in some years, and these figures casts serious doubt on the reported P&L of Chinese companies.

Focal points in the attached presentation:

  • Slide 5: 2003-2006, 25% to over 100% overstatement of reported exports if you use constant unit values.
  • Slide 10-13: increase in reported export value is not due to price increases of exports to US, Japan, or EU.
  • Slide 17: increase in reported export value is not due to wage increases.
  • Slide 19: increase in reported export value is not due to quality improvements.
  • Slide 21: capital inflow suggested by drop in spread of 3-mo RMB repo's from 1.59% to (2.41%), and drop in spread of 3-mo CHIBOR vs LIBOR from 1.66% to (2.57%).
  • Slide 28: capital inflow seems to have gone into investments in PP&E.
    Slide 29: capital inflow seems to have gone into real estate investment


hat tip Richard

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Mos's picture

Confucius say "China market going down faster than cheerleader on prom night."

Daedal's picture

Just don't tell this to Burt Malkiel -- he's taking random walks in China now.

Anonymous's picture

Should be "may have actually RUN... "

-Grammar Nazi

Anonymous's picture

No. Should have been "actually may have run".

Anonymous's picture

How dare you question your new overlords?

Hondo's picture

I agree..I've never trusted the data....look how hard it is for the US to get it right (if you trust it...I’m still suspicious).  The fact remains that they do have many, many dollars.....and they have received those dollars from either trade or their own printing press (which I believe the probability of this is greater than zero).

crzyhun's picture

Whoever is in charge of advtsg on the site needs to get a free chinese beer. "Asian girls" is very funny.

China is hinkyier than a silk worm in winter.

Those numbers are like the old 5 year plans from the Sov's in the 50's. However, could you imagine where USA would be without them, the chinese, not the Sov's??

thinkinghardwillkillya's picture

Sov's helped too... USG protection racket was very profitable for decades... would not have worked without the Russian threat

Anonymous's picture

I agree with the Grammar Nazi. Let's not loose one of the tenses of the English language because of ignorance.

Pietro_F's picture

I love the "Asian Girls for Love & Marriage" banner ad that Google so tastefully matched to this post.

Anonymous's picture

This seems like some kind of Bernie Madoff scam. Over state your profits to bring in stealth investment money. Sell you product for little or no profit.

What is in it for the factory owner? Maybe he can make some money by selling stock or maybe they plan on pocketing the overseas investment money.

You can get access, get your money in, but you can never take it out.

Anonymous's picture

There are many possible reasons to do this sort of scheme.

1. The "foreigners" are actually Chinese who want to get better tax deals as a "foreign owned" company. Plus they can then use their OBU to make sure all profits actually happen in HK instead of in China.

2. Money laundering of various kinds.

Anonymous's picture

The Chinese inflate their numbers to entice Americans--who are desperately trying to recoup their loses from the broken US economy--to invest in their "robust" economy. Our Chinese investments are not guaranteed, but the savvy Chinese take their paper profits and buy US Treasurys, which are guaranteed. What a system we have.

Anonymous's picture

Re: So he used the past form of run which is ran instead of the past participle which is run. The present perfect form is have run. I am a grammar nazi, but in the scheme of things who cares... run, ran had or have run, it's all good.

TomG's picture

I doubt if any government/company is above cooking the books for

a "good" reason, but a government puts to death a CEO who took

bribes (in the Telegraph a week or so ago) is on whole different moral

ground than anyone in this country – commentator, politician, or


Glen's picture

Be nice if Australia's economic commentary and "analysts" would pay this much attention to detail as they do to working themselves into an orgasmic lather on every bit "good" news that emanated out of China.

Anonymous's picture

one of best zh articles of the past couple of weeks....the inordinate fear of chinese economic strength is the same hysteria which fueled the "japanese will rule the world" mania in the 1980s and the "soviets will land on the moon first and rule the world" mania of the 1960s/70s and all other cia invented lies to whip the country into some kind of action....

communist governments are exceptionally dishonest in financial reporting.....did we not learn anything from the cold war?? or course the usa govt is full of its own lies and mark to myth takes us down that tried and false road of accounting fraud....capitalism and communism converge in a bed of corruption....

Anonymous's picture

TD, I usually do well reading numbers, but the ones in those slides make no sense to me. Is there any discussion besides the limited discussion between the slides? It is really hard to see how the US would have gone from a very marginal deficit in 1997 to the moon by 2000 and stay there. I suspect this is the work of our former Secretary of Treasury Rubin with his former employers Citi and Goldman involved. The news is the Chinese market is up 86%. The bad news that isn't told is it was down 75% and needs to make nearly 300% to get even. $2 trillion is a hell of a lot of money for a country that couldn't pay attention 15 years ago.