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The Reality Behind The Numbers In China's Boom-Bust Economy
Submitted by Yonathan Amselem via The Mises Institute,
Last year, the world was stunned by an IMF report which found the Chinese economy larger and more productive than that of the United States, both in terms of raw GDP and purchasing power parity (PPP). The Chinese people created more goods and had more purchasing power with which to obtain them — a classic sign of prosperity. At the same time, the Shanghai Stock Exchange Composite more than doubled in value since October of 2014. This explosion in growth was accompanied by a post-recession construction boom that rivals anything the world has ever seen. In fact, in the three years from 2011 – 2013, the Chinese economy consumed more cement than the United States had in the entire twentieth century. Across the political spectrum, the narrative for the last fifteen years has been that of a rising Chinese hyperpower to rival American economic and cultural influence around the globe. China’s state-led “red capitalism” was a model to be admired and even emulated.
Yet, here we sit in 2015 watching the Chinese stock market fall apart despite the Chinese central bank’s desperate efforts to create liquidity through government-backed loans and bonds. Since mid-June, Chinese equities have fallen by more than 30 percent despite massive state purchases of small and mid-sized company shares by China’s Security Finance Corporation.
But this series of events should have surprised nobody. China’s colossal stock market boom was not the result of any increase in the real value or productivity of the underlying assets. Rather, the boom was fueled primarily by a cascade of debt pouring out of the Chinese central bank.
China’s Real Estate Bubble
Like the soaring Chinese stock exchange, the unprecedented construction boom was financed largely by artificially cheap credit offered by the Chinese central bank. New apartment buildings, roads, suburbs, irrigation and sewage systems, parks, and commercial centers were built not by private creditors and entrepreneurs marshaling limited resources in order to satisfy consumer demands. They were built by a cozy network of central bank officials, politicians, and well-connected private corporations.
Nearly seventy million luxury apartments remain empty. These projects created an epidemic of “ghost cities” in which cities built for millions are inhabited by a few thousand. At the turn of the century, the Chinese economy had outstanding debt of $1 trillion. Only fifteen years and several ghost cities later that debt has ballooned to an unbelievable $25 trillion. What we’re experiencing in the Chinese markets are the death throes of an economy that capital markets have realized is simply not productive enough to service that kind of debt.
GDP and Other Crude Economic Metrics are Misleading
GDP is meant to represent the collective value of all transactions within a certain boundary. This metric provides very little useful or accurate information about the actual quality of life in a country. GDP is artificially inflated by imputations such as the added “value” of a house owner not having to pay rent. GDP also includes government spending — such as when a government department purchases new computers. This transaction merely redirected labor and raw materials that would have otherwise been used to directly satisfy consumer demands with better or additional products. Government spending is not just “neutral,” it is actively destructive. Government purchases and sales do not operate with the same rules that other actors in the market are subject to. Thus when we look at GDP numbers from a country drunk on spending newly printed money on projects completely devoid of market signals, we should not place too much faith in them.
The IMF report and those who took it seriously relied heavily on GDP calculations when arriving at their astounding conclusions about China’s growth. To compare the Chinese and American economies using a crude metric like GDP is like trying to gauge the athleticism of an individual by how much sweat comes out of his pores. When one economy can produce companies like Google, Boeing, Costco, and General Electric while another builds empty homes, what meaningful information could an unsophisticated metric like GDP tell us? Much to the chagrin of Keynesians, not all spending is created equal.
Not long ago, we were haunted, not by the specter of this “red capitalism,” but by the communism of the Soviet Union. Some fifty years ago, mainstream economists blabbered tirelessly about the rising Soviet powerhouse. According to popular wisdom, the managed Soviet economy did not have the inefficiency and economic drag inherent in the “random” and “chaotic” American capitalist economy that sent some into mansions and others into bankruptcy. The widely-read Economics: An Introductory Analysis by Nobel-prize winning economist, Paul Samuelson predicted that Soviet GDP was nearly half that of the United States, but by 1984 (and surely by 1997), the strength of the Soviet economy would surpass that of the United States.
The Soviet Union crumbled. When experts rely on crude metrics we should not be surprised when experts are wrong.
The US Federal Reserve orchestrated an artificial boom from 2001 to 2007 through artificially low interest rates and has resumed doing so once again. Entrepreneurs operating under faulty market signals created by the Federal Reserve malinvested hundreds of billions of dollars into capital intensive projects primarily in the housing sector. We paid for our boom with millions of destroyed jobs, wasted labor, and wasted resources. The Chinese Central Bank learned nothing from the Fed’s catastrophic experiment. They will reap the same rewards.
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Don't overthink this.
One word...
demographics
Get your tribe in order motherfuckers.
Laws - word...
Demographics - Why the story of China is the story of Japan x10
http://seekingalpha.com/article/3526426-the-story-of-china-is-the-story-of-japan-just-10x-bigger
What has impressed me about China, is how quickly those who have capital want to get out,
and stay out. Does not bode well.
They're using that wacky visa program, whereby f they invest 'x' in a project here in the States, they get a path to American citizenship.
Sure, but it shows zero confidence in their own country,
and any ability to hang on to what they have.
"Sure, but it shows zero confidence in their own country, and any ability to hang on to what they have."
And that lack of confidence is fully justifiable. To get an idea of the real situation in China, watch this Chinese expat channel on YouTube:
https://www.youtube.com/user/NTDChinaUncensored/videos
The view that far too many westerners have of the great, centrally planned, massively corrupt, "Red Capitalism" miracle called "China" is completely warped by the fawning financial media coverage, as wrong on that as it is on everything else, and the sycophantic pricks like Zuckerberg, iPrick, etc., drooling at a 1.3 trillion customer market. Zucherberg even had a copy of Xi's book on his desk! He should cut the BS and just get down on his knees and blow a Xi. The CCP's labor camp and organ harvesting Xi.
"The Capitalists will sell us the rope with which we will hang them." - Vladimir Lenin
"They're using that wacky visa program, whereby f they invest 'x' in a project here in the States, they get a path to American citizenship."
$500,000. Fine by me although I'd up it to 1 million.
You must consider other factors, such as if they have ben cheating the Chinese tax system and breaking trade and patent laws. Many that have prospered are of this ilk, but in the end will move and hire substantial numbers of their fellow countrymen, spreading Chinese influence. The also move out using instruments of debt, such as US T-bills that are accepted as money by those that sell to them where they relocate and in private deals that may be in great discount. Consider that implication, especially as many are moving to Central America.
"You must consider other factors, such as if they have ben cheating the Chinese tax system and breaking trade and patent laws."
And with that you just described the standard Chinese business model. Do a Google search on "chinese culture intellectual property" without the quotes. You can find scholarly studies which reveal that IP theft is an ingrained part of Chinese culture. It's not only considered completely normal, but is even praised.
CCP corruption is a huge hold-over from the Mao era and far worse now because there is so very much more money to be skimmed. "Reforms" via "anti-corruption" campaigns have always been and continue to be just the way to get rid of adherents to previous power bases.
"Consider that implication, especially as many are moving to Central America."
Because there they will be more easily be able to continue their corrupt status quo. Those who move to the US won't be able to carry on in quite as blatant of a fashion.
I'm old enough to remember when Japan was the economy that was supposed to overtake the United States. Something else happened.
Exactly. Their demographics and 30 years of QE seriously doom them. Demographics are also a huge problem for China's future.
Regardless if there are elections or no elections, a government which cannot be held accountable by the people is illegitimate.
" faulty market signals " are creating a dangerous housing and buy to rent bubble in the UK. With banks and bonds at zero, those with money have all piled into property and into buying homes and flat to rent out. "Buy to Let" investing has replaced all other forms of saving inside the UK. Large firms sell investments in huge property companies who buy and let flats and houses across Britain. Over investment has caused sky high prices everywhere across the UK. No normal person can any longer afford a home, so they rent, and rents are driven ever higher by the drive for returns by the big and small "Buy to Let" empires.
Everyone with any money is in "Buy to Let", driving prices so high it is insane! When the artificial central bank pimping of property, and zero interest rates does end, trillions of pounds could evaporate in housing equity overnight, this melting down the whole UK, banks included, as many bought property on speculation and leverage.
Excellent.
The USSA is just as bogus as China. And oh, by the way, don't be so proud of Google, Boeing, Costco, General Electric and their ilk.
Google is mostly vaporware, and is a grossly nefarious and extremely evil arm of the NSA, CIA and other evil packs of human predators (substantially financed under the table by these same entities).
Boeing has only been profitable due to import-export bank fraud, massive tax-jiggering, lobbying (in both USSA and elsewhere), and astronomical money/debt-creation by central banks in many nations (funding insanely bloated military-industrial complex and mass destruction).
Costco is a big box full of products other companies make, and produces nothing itself. And another beneficiary of central-bank money/debt-creation.
General Electric pays no taxes, and in fact receives refunds! They too stay afloat by creating debt out of thin nothing, and by endless central-bank debt-funded military-industrial complex waste and destruction.
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This is NOT to justify empty cities and roads to nowhere... they are most certainly stupid too. They too were made possible by central-banks and central-planning, and most of this waste will degrade substantially before humans populate them.
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What was once good about the USA is now almost gone. Tiny bits and pieces of residual value and good remain here and there, but almost NONE in large corporations anywhere on the planet. Virtually every large corporation on the planet is now full-bore evil and full-bore destructive. And the flip-side... start-ups and small corporations which are sometimes (but not always) productive and beneficial, are not being started due to the massively rigged financial system. Plus, nobody in their right mind would start a new business given the overwhelming corruption and interference new companies need to face today (even one-table lemonade stands for that matter).
Excellent post. I was just going to write the same thing. We lived in USA for 20 years and are so glad to have gotten out. Yes, China is going bust but so is USA and along with them the rest of the world. But the real rioting and mayhem will be in China and USA for sure.
BTW, GM and Ford are decades behind in technology compared to German and Japanese auto makers. So one can say that USA really doesn't have must real technology left. If Japan and China have to bid to build high-speek railroads in USA, that is a sure sign that the country is becoming devoid real technology.
One more point; Most of the technology in USA is done by foreign-born, mainly Asians, Chinese, Indians, Koreans and Japanese to name a few. From my experience in talking with many of these people (I am Indian BTW), there are FEW that do not have either a second citizenship or the means to get a second citizenship. Increasingly countries that officially do not allow holding two passports are turning a blind eye to this. So one can say that most of USA tech talent is "ready to go" if and when the need arises.
I agree and it could be only as far as south of the border
Don't forget, the source of China's liquidity bubble were $30 bn + monthly US trade deficits with China. The Chinese central bank couldn't neutralize these surpluses, so the went into all sorts of pharaonic investements (as they did in Japan in the 1980's). The real source of the worldwide bubble is only and alone the FED.
those notes of debt are what China lets out, not their currency.. it is coming home to roost T-bills and US bonds are for the short term only and their asset value can erode very fast killing the interest income on the sale.. watch out!
One similarity between zerohedge and the Western mainstream media is that both are full of China-bashing articles. The Chinese economy, despite its recent slow-down, will probably be the biggest based on market exchange rate in the world in the 2020-2025 time frame anyway. I guess the thought that China does not really need GE, GM, and IBM etc to be the world's largest economy makes some folks uncomfortable for some reason.
The China bashing has some truth, but ignores the fact that China, a single party system, can change from faulted policy better than any nation in the world as it has in the past with the erroneous policies of the Gang of Four. Yes there will be apparent hurt as seen by the eyes of MSM as they are 2%ers if most nations and only report on their equivalent's condition.
The fact is that China is changing and has saw 'the light', but change has a downside and that has to be gone through and better sooner than later.
The Axiom is that the stall-wards to change take it the hardest. Look who's talking and not doing.
Its a case of NOBODY wants to be the first failure.
The mistake that western commentators seem to all make when talking about China is that they assume that the Chinese central bank is owned by the same Rothschild led group of criminals that own the Central banks in the west. This assumption is wrong as the Chinese central bank is owned by the Chinese government. This changes everything as it means that the malinvested money in China can either be made interest free or simply written off without affecting the ecconomy. Money, according to the Fed and Bank of England, is invented into existance out of thin air. This means it can just as easily be cancelled. The lesson this should be teaching is how the right to create money needs to be owned by the public rather than by the criminal Rothschild cartel. The west is on track for economic oblivion because we have not learned this lesson. China will avoid this fate because it has learned this lesson.
"This changes everything as it means that the malinvested money in China can either be made interest free or simply written off without affecting the ecconomy."
Right, just as all US treasuries held by China could be nullified with the stroke of a pen. But then, who'd ever buy them again?
Same for debt within China. If China did what you say, who'd ever invest there again? And that's just the most obvious problem with that idea. No country is an island in the world financial and monetary system. They're worried right now about the outflows from China and they're just getting started. The CCP's foolish attempt to cause a wealth effect from an equities bubble is failing and will not compensate for their ongoing real estate bubble deflation which will make sub-prime here look like nothing.
Read up on their banking system. What a messy maze, much of which is in shadow banking.
"Last year, the world was stunned by an IMF report which found the Chinese economy larger and more productive than that of the United States, both in terms of raw GDP and purchasing power parity (PPP)."
Because we all know how incredibly accurate every analysis and projection made by the IMF is, especially when using data provided by China.
If "IMF" is seen in a news title, any conclusion mentioned in it should be considered 180 degrees from reality.
Lagarde: "China's Slowdown Was Predictable, Predicted"... Yes, By Everyone Except The IMF
http://www.zerohedge.com/news/2015-08-29/lagarde-chinas-slowdown-was-pre...
Five Years Of Glorious IMF "Hockey Stick" Comedy
http://www.zerohedge.com/news/2015-07-09/five-years-glorious-imf-hockey-...
"The IMF report and those who took it seriously relied heavily on GDP calculations when arriving at their astounding conclusions about China’s growth. To compare the Chinese and American economies using a crude metric like GDP is like trying to gauge the athleticism of an individual by how much sweat comes out of his pores."
Wow...Amselem nailed it. Great analyis except for some minor dogma issues. Well done!
CHINA is FUCKED IN ALL ORIFICES. That is not "sweat". Its the urine from a million investors squirting onto it.
"Yet, here we sit in 2015 watching the Chinese stock market fall apart". A little premature: China's stock market is up a solid 100% YOY.
"China's real estate bubble". China's real estate market is all of 15 years old. Like its equally novel stock market it needs time to mature so we should expect ups and downs. In the meantime, if you comp China's regional real estate prices with others you'll find that, for example, Beijing prices are half thoss of New Delhi's.
"GDP and other crude economic measures are misleading". So let's look a little closer: the four most valuable companies on earth are all Chinese. They're all service companies, too. (And all State-owned). Nor should we be to cocky about our tech companies. China leads the world in a dozen 21st. century technologies whose payoff is just beginning.
And as to the 'misleading' nature of China's GDP figures, read this: Detailed analysis of China's GDP indicates economy is actually 15% larger than official figures: http://csis.org/files/publication/150824_Rosen_BrokenAbacus_WEB.pdf
Debt? Here's a chart from the World Bank’s country director for China and Russia, Yukon Huang"
I've been following China's economy for 40 years. The reporting on it is as awful today as it was in 1975. The economy isn't: it's moved on.