China's Economic Paper Tiger

There’s been quite a bit of buzz in the late about China’s slowing economic growth. Gordon Chang’s blog brings us an interesting paper by the China Center for Economic and Business which estimates that China’s economy is 1/3 smaller than orginally thought:

In a report released on June 20th, the business research organization Conference Board recalculates Chinese gross domestic product going back to 1952. Economist Harry Wu estimates that China from 1978 to 2012 grew an average of 7.2 percent a year. Beijing’s National Bureau of Statistics reports 9.8 percent average annual growth during that period.

Generally the article argues that economic data since 1977 is considered unreliable. Those of us here with a healthly skeptism of Government find this unsurprising (how many revisions has that number undergone!?) but not trusting data post 1977 takes that skeptism to another level.

More from the paper:

For several years now, China Center researchers worked to illuminate China’s productivity performance — a critical input for gauging the overall sustainability of any economy. This is not an easy task, as data issues involved are very difficult. In this special briefing paper”, Senior Advisor to the China Center Harry X Wu presents the findings of his 30-year long work program on re-estimating Chinese GDP. Wu’s results indicate that Chinese TFP growth went negative during the period from 2007 to 2012. Overbuilding, overcapacity, underutilization, and the “advance” of the state into private sector markets are now substantially dragging on China’s growth.

At the moment, China’s economy is vulnerable to shocks, but the biggest one might not be external. In order to create GDP, Chinese leaders have incurred indebtedness at an extraordinarily rapid pace. Beginning especially at the end of 2008, Beijing has essentially ordered the building of “ghost cities,” high-speed rail lines to nowhere, and factories with little demand for their products.

Here are the key findings from the article:

Since 1978, there is evidence of a strong upward bias in official GDP estimates that emanates from several sources. Removal of the bias yields a significantly lower aggregate growth rate.

On average, our new estimate of China’s GDP growth for the reform period 1978-2012 is 7.2 percent per annum (p.a.), which is 2.6 percentage points lower than the official estimate of 9.8 percent p.a. As for the “central planning period” of 1952-1977, our result is almost the same as the official estimate of 4.3 percent p.a., although there are differences between our estimate and the official estimate over sub-periods.

Examining changes over time, our new results show greater volatility and slower growth than the official estimates, which appear, in particular, to understate slowdowns.

External shocks to the economy are much more pronounced in our new results than in the official estimates, suggesting that the Chinese economy is more vulnerable to external shocks than the picture painted by the official GDP estimates.

For the period of the global financial crisis and its aftermath, 2008 to 2012, we show that, on average, the real GDP growth might have been as slow as 6.5 percent p.a. on average instead of the officially reported 9.3 percent p.a. More specifically, we find that growth in 2008 was only 4.7 percent compared with the official estimate of 9.1 percent, and 4.1 percent in 2012 compared with the official estimate of 7.4 percent.1

For the period of the global financial crisis and its aftermath, 2008 to 2012, we show that, on average, the real GDP growth might have been as slow as 6.5 percent p.a. on average instead of the officially reported 9.3 percent p.a. More specifically, we find that growth in 2008 was only 4.7 percent compared with the official estimate of 9.1 percent, and 4.1 percent in 2012 compared with the official estimate of 7.4 percent.1

Thomas “I have a hardon for authoritian China” Friedman and the religiously zealot Keynesian school members really ought to take note. You can go read the rest of the article (I went to the trouble of downloading the article myself, thank me very much…lol). You can only inflate your economy so much and right now, that’s exactly what China’s been doing. China’s real estate market is in collapse due to construction of so-called “ghost cities.” 

 

[youtube https://www.youtube.com/watch?v=yZvcQDjj3Qk&w=560&h=315]

China’s plan is to “coerce” State owned enterprises to move to these cities!? Well, this isn’t really new. The Czarist Russia and the Soviet Communists did the same thing then called Potemkin Villages:

Gregory Potemkin was a favorite and lover of the Russian Empress Catherine II. After Russian conquest of modern Southern Ukraine and Crimea from the Ottoman Empire and liquidation of the Zaporizhian Sich (see New Russia), Potemkin became governor of the region. The area had been totally devastated during the wars by the Russian army, and Potemkin’s major task consisted of rebuilding it and bringing in Russian settlers. As a new war was about to erupt between Russia and Ottoman empire, in 1787 Catherine II made an unprecedented six month trip to New Russia, with her court, several ambassadors, and (according to some sources) the Austrian emperor Joseph II, travelling incognito. The purpose of this trip was to impress Russia’s allies ahead of the new war. In fact, Potemkin assembled a few “mobile villages”, located on banks of Dnieper River. As soon as the barge carrying the queen arrived, Potemkin’s men dressed up as peasants would show up in the village. Once the barge left, the village had to be disassembled and rebuilt downstream overnight. Potemkin later led the Russian army in the Russo-Turkish War in 1787-1792.

The deserted 5-star Country Garden Phoenix Hotel stands in Conch Bay in Tianjin, China. Photographer: Steve Engle/Bloomberg
The deserted 5-star Country Garden Phoenix Hotel stands in Conch Bay in Tianjin, China. Photographer: Steve Engle/Bloomberg
Buildings stand in the Conch Bay district of Tianjin, China. Photographer: Steve Engle/Bloomberg
Buildings stand in the Conch Bay district of Tianjin, China. Photographer: Steve Engle/Bloomberg

There are plently of economic lessons learned here. Geopolitically, it could explain China’s recent behavior in the South China Sea towards Vietnam and the ongoing ADIZ problems with Japan. China’s plan would be to keep the domestic population looking out and forment outrage against “outsiders” and distract them from their own domestic problems.

What does this mean for us? Well, we’ve got more to worry about from a China that’s not opposed to lashing out internationally than we do a China that REALLY economically prosperous.