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You Kiddin' Me?
After I wrote the last note about China, a friend wrote, “So what? Who cares what is going on in China?”
If the Chinese economy was the size of the Vietnam's, and if China was not responsible for more than two-thirds of our trade deficit and didn’t hold $2.2 trillion in foreign reserves (about half of which is in US dollars), I’d be spending a lot less time thinking and writing about it. However, what happens in China in the near future will have a significant impact on the world, and more importantly, on our own economy.
It will impact interest rates, the dollar, commodities and demand for industrial goods; and it will have geopolitical consequences as well. China matters a lot!
And, of course, the Chinese economy and its reported 7.9% growth annual growth rate makes us feel inadequate, whether we admit it to ourselves or not.
Another friend said: “You pick on the wrong governments. First Russia, now China. They’ll have you killed.”
Well, call it bravery, call it stupidity, here is my latest article explaining why the Chinese economy should not make us feel inadequate and explaining the consequences of what is taking place in China on the U.S. stocks. (You can also watch my interview with BNN TV (the Canadian version of CNBC) on the same topic. Fair warning, my wife thinks my hands should be tied to the chair when I talk on TV, and she has a valid point. Bur I cannot talk without my hands).
The Chinese have gotten this economy thing figured out:
- Large population migration from farms into cities boosts productivity.
- Abundance of cheap labor gives it a comparative cost advantage.
- Through government controls its currency, the renminbi, is kept artificially low against the dollar and euro, making its cheap goods even cheaper
- The controlled free-market economy (an oxymoron, if you ask me) allows the government to do whatever it wishes on the fly. If it decides that banks "have to" lend, banks only ask how much.
Its economy can grow through good and bad times. In fact, there are no bad times for China. You'd think that an export-based economy would at least take a pause when its exports to the developed world drop off the cliff.
No, not China, which spit out growth numbers last week that are the envy of the West even in the best of times. The country showed robust GDP growth while electricity consumption declined.
The laws of economics appear to be suspended for the Chinese, but they are not. They just have "better" accountants, ones that would make Enron's bean counters seem like dilettantes. A paper published by John Makin at American Enterprise Institute explains very well how Chinese got their GDP growth:
"Once China had announced its 8 percent growth target, it began to disburse funds directed at a sharp increase in public-works spending," Makin wrote.
"It is important to understand that the disbursal of funds is recorded as GDP growth," Makin continued. "So the government can easily control the pace of growth by the pace at which it releases funds that have already been allocated in the stimulus package to the creation of higher production or growth numbers."
Nice trick, huh?
"Funds disbursed for fixed-asset investment by state-owned enterprises or provincial governments are counted as having been spent when they are disbursed," Makin noted.
So those of you who feel inadequate -- stop. If the US were to compute our GDP based on Chinese methodology Google would be our middle name. Why does Chinese GDP growth matter? Well, a significant portion of stock appreciation going into 2008 was driven by deep cyclical companies that make "stuff," i.e. energy, materials and industrial companies like Caterpillar, ExxonMobil and Arcelor Mittal.
In the beginning it was the US economy coming out of the recession that lifted those stocks -- however, in the later stages of the rally, the incremental demand was driven by Chinese growth. Though the Chinese economy constitutes only 7% of the world economy, it was responsible for a disproportionate amount of the incremental demand for oil, metals and industrial goods.
When the global economy went into recession demand for "stuff" evaporated -- and stuff stocks dropped. But recently they had a serious rebound on the hopes that Chinese economic growth would result in revival of demand for their goods. However, the fictional growth coming out of China is putting that hope to rest. If you own these stocks, you've been warned.
Vitaliy N. Katsenelson, CFA, is a portfolio manager/director of research at Investment Management Associates in Denver, Colo., and he teaches a graduate investment class at the University of Colorado at Denver. He is the author of "Active Value Investing: Making Money in Range-Bound Markets" (Wiley 2007). To receive Vitaliy's future articles my email, click here.
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1.China's statistics is NOT more cooked/fudged than those put out by the US gov.
2. China's growth is for real. All you need to do is to go there and stay in that country for some time. One can feel the vibe there! Here in the US, it is like death water.
3. GDP is a funny statistics anyway. People in China call GDP as "Chicken's fart" due to the same pronounciation of GDP in Chinese. but in fact, GDP counting is a joke. And it is true that majority of Chinese are NOT necessarily benefit from their high growth.
4. Before one attacking China on faking their statistics, you had better understand how GDP is counted.
There is a story circulated in China about this. Two people walked on the road, and one person saw there was a pile of dog shit in front, and he told the other one if you eat it, I would give you 50 million dollars. And the other person first did not want to do that, but want that 50 cool million, so he did that, and got the 50 million. they kept walking. The one who just eat the dog shit felt so sick, so vomited all those dog shit out. Then he said to the other, if you eat it, I would give you those 50 million back. The other one want the money back, so he did it. One pile of dog shit, made a round trip, created 100 million Dollar GDP for the economy.
Yes, this is a fiction story, but the capitalism-invented GDP is indeed counted this way! wonder how 14 trillion US GDP produced? Yeah, not by eat dog shit, but most of US GDP is serviced based, they are generated by you scratch my back, and I scratch yours.
So before your guys calling on China faking their numbers, you should ask yourself, is this GDP a legitimate measure of economic growth???
Chinese statistics are crap indeed. however, given that US numbers get revised nearly every single time, who gives?
The fact is that that a billion people who used to be told to not bother getting rich are going hell for leather to do so. So this years growth may be manufactured? So what, how about next year and the year after and the year after?
You think these people are going to be happy manufacturing 98% of the world's dildos forever on crap wages? Think again. The US share of world manufactured exported goods peaked somewhere in the fifties, didn't do you guys too much harm en route to world domination did it?
'Though the Chinese economy constitutes only 7% of the world economy, it was responsible for a disproportionate amount of the incremental demand for oil, metals and industrial goods.'
More than just incremental demand, China was responsible for the majority of the world's growth last couple years.
'The country showed robust GDP growth while electricity consumption declined.'
That was a huge confirmation that China Inc. has been playing a GE-Style game of 'beat the numbah'. What is less covered is that in the good times they underreported growth from the provinces in order to tame inflation expectations so they had some growth in 'the bag' so to speak that they were initially able to pull out.
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I have a question that I am not sure anyone can answer:
Is there any disclosure regarding how much Chinese SWF or companies are buying of our equities? They are trying to diversify 2 trillion of US debt, commodities and equities come to mind from a diversification strategy.
Is it possible that the US market increases are part of China's 2 trillion question of where to put their surplus and they are investing in US stocks and hedging inflation through equity purchases in dark pools?
I think Goldman Sachs is an advisor to China, perhaps they are front running the Chinese as well on their stock purchases.
nice piece vitaliy.I think it's great that there's some people out there trying to counterbalance all the BS we hear about China this and China that.They have a few quid in the bank admittedly but the social dislocation that occurred to earn it is what may well bring them down.
as for the property bubbles,it's amazing that learning the lessons the west has over the last two years,few can see the bust coming.
by the way,keep with the hands in the interview.it shows a little bit of animation compared to the usual damp squibs that get served up on the whole
“So what? Who cares what is going on in China?”
Straw man?
China is not without their weeknesses, which are numerous.
1. Unemployment has been growing for the past 2 years and will continue (despite work projects, etc.).
2. They have stimulated their economy but that is ending and they can't stimulate the economy indefinately.
3. Real estate bubble is still bubbling and when it bursts it will be a wopper. The ongoing commercial real estate projects are laughable. Last year new skyrise buildings are vacant and they are still building. This is an unbelievable glut.
4. Reportedly 25% of the government stimulus has found its way to stock market and realestate speculation. This report is from the government (go figure).
5. For the past several years rioting has increased around the country. In the good ole days there would be a "dust up" in the rural areas but that was easily crushed. Now with Chinese increasing unemployment, migrant worker unemployment and the average citizen more informed about the outside world (internet, etc.), the government is finding it more difficult to suppress the population. Lets face it, killing hundredes of people on a weekly basis and trying to keep it quite today isn't like the days of the good chairman Mao.
Oh well, just a few thoughts on China.
Hey Vitaliy, thanks. hard to believe people would argue w/a guy from the commmunist bloc on the workings of the commie state. I haven't been there but living almost 20 yrs in the 3rd world has taught me that there's hardly any bridge they can't sell to a gringo tonto if he wants to believe
So what's wrong with spending government money to improve public infrastructure?
Okay, fine, but how do you trade it? China has all our money now -- and you can't do much about it. So they manufacture economic growth. They have deep pockets so they can keep doing it as long as they want. So if you think you can trade china by "shorting" it or whatever, now, the timing seems dubious. With nearly $2T in reserve assets it can go on for a long time...
I'd rather be in their position then ours, where we ran up a huge debt tab and have to figure out how to either deflate the debt or take on more in a feeble attempt to stimulate and create inflation. Better to be stimulating when you are rich than stimulating when you have to do it with debt...
That's making too munch sense.
Not to mention they might use some of that to buy our markets...
Robust GDP growth with decreasing electricity consumption. No wonder we cannot compete.
Nice article. cant trust the Chinese.
sleazy linking practices; borderline fraud ..http://www..
hat tip: gay porn and deceitful, slimy operators
we should drop a bomb on them. Let's make yellow GOOOoooo!
"Once China had announced its 8 percent growth target, it began to disburse funds directed at a sharp increase in public-works spending," Makin wrote.
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Isn't it Cash for Clunkers and Obama's Stimulus Plan that accounted for a lot of positive "economic" news this year? And Fed measures to prop the housing sector and various industries?
At least the Chinese are distributing cash from a position of strength and surplus rather than debt.
I mean, I suppose there is a double-counting issue with the consumption generated by the cash distributions but since there are multiplier effects involved is it really that big a deal?