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China states the obvious

16 Dec

It appears that not all economic bureaucrats are mad fantasists (Christian Noyer, take note). For the message from China’s Central Economic Work Conference this week was that maintaining stable growth will be China’s macro-economic policy for the coming year. 

The China Daily opines that “this is a sensible choice given the international and domestic situations”. On the other hand, it is probably the only option open to them these days.

The CD continues:

Internationally, the eurozone sovereign debt crisis has worsened and the US economic recovery remains weak, while domestically rising production costs are compromising the traditional competitive advantages of Chinese exports. It is thus unrealistic for China to continue relying on exports, whose growth has become much slower and will further weaken in the coming year. 

Unusually for the paper, there then comes a bordering-on critical assessment of the state of the Chinese economy, and gives some tips for the Government to follow.

Shanghai: hoping for steady growth

Meanwhile, the Shanghai Composite Index, the main gauge of China’s stock market, has dropped to a 10-year low. Quite a number of small and medium-sized enterprises in coastal regions are struggling amid broken capital chains and the high-flying consumer price index continues to dampen public confidence in the health of our economy. 

Given this, it would be unsustainable and risky for the country’s economy to follow its old growth pattern and rely on investment as the major economic driver. 

On the one hand, there is the urge to squeeze the bubble in the real estate market and keep commodity prices at a reasonable level. On the other hand, to keep unemployment low, there has to be reasonably high growth. 

The country needs not worry about so-called new growth points. Given that we still have a long way to go to achieve industrialization and urbanization, opportunities abound. 

Community management, for instance, if well planned, will be able to create jobs and considerably improve the quality of life for residents. For example, the non-hazardous treatment of garbage has not been realized for most cities. If garbage classification can be well implemented, jobs will be created and the urban environment will be improved. 

So investment should be tilted in favor of the areas, which will bring direct benefits to the life of residents. At the same time, efforts will have to be made to increase the ranks of the middle class and raise the income of those low-income residents. People’s consumption capacity will have a bearing on the country’s economic growth momentum in the near future. 

It is absolutely right for central authorities to realize that development focus must be placed on the real economy, given the lesson from the financial meltdown on Wall Street and the eurozone debt crisis. Policy support including tax reforms will hopefully help small and medium-sized enterprises with their financial difficulties and with their technological upgrading as well. The increased consumption capacity will lay the foundation in turn for the development of the real economy. 

This virtuous circle will be the key to maintaining stable economic growth. 

Western politicians reading this will spot several familiar themes, not least the need to spread the benefits of wealth-creation to as many people as possible.

The question is though, will the economy remain stable and with enough growth to make any of these adjustments? If the hard landing hypothesis is true, then the aspiration of stable growth may compete well with Europe for outlandishness.

Time for the Great Fall of China?

30 Nov

Is China broke? Regular readers of this blog, or indeed of any serious Western paper, will possibly smirk at such a suggestion. With foreign currency reserves of US$3.2 trillion, Beijing has a lot of money in the bank. A budget deficit of just 2.8% of GDP in 2010 compares well indeed with the United States’ 9.2% in the same period. And inflation, although high at 6.2%, is falling. To cap it off, GDP growth is still heading for a startling 9.1% in 2011.

Chinese cars are paved with gold

Yet not all of this is as good news as one might think. Take first the $3.2 trillion. As the Economic Times points out, most of money in the world’s biggest store of FX reserves is prudently kept in near-cash instruments to fund import and debt service bills in the event of an unforeseen domestic emergency, or invested in long-term assets that, if for example sold in size to help Europe, would spark panic on global financial markets.

Secondly, there are those that say China is acting like an old-fashioned magician, and clouding its true economic position in smoke and mirrors. Statistical manipulation is hardly a stranger to Government, but China does have a particularly strong record in this, going back to the early days of the Communist regime and beyond.

Indeed, there are more and more voices inside China opining exactly that. For instance, there has been a fair bit of attention given to a lecture given recently by Professor Larry Lang.

Lang, chair professor of Finance at the Chinese University of Hong Kong and a famous TV personality, said in a lecture that he didn’t think was being recorded that the Chinese regime is in a serious economic crisis and indeed on the brink of bankruptcy. In his memorable formulation, every province in China is Greece.

In the unusual, closed-door lecture, Professor Lang gave a frank analysis of the Chinese economy and the censorship that is placed on intellectuals and public figures. “What I’m about to say is all true. But under this system, we are not allowed to speak the truth,” he said.

Professor Lang’s assessment that the regime is bankrupt was based on five conjectures.

Firstly, that the regime’s debt sits at about 36 trillion yuan (US$5.68 trillion). This calculation is arrived at by adding up Chinese local government debt (between 16 trillion and 19.5 trillion yuan, or US$2.5 trillion and US$3 trillion), and the debt owed by state-owned enterprises (another 16 trillion, he said). But with interest of two trillion per year, he thinks things will unravel quickly.

Professor Lang: true or false?

Secondly, that the regime’s officially published inflation rate of 6.2 percent is fabricated. The real inflation rate is 16 percent, according to the Professor.

Thirdly, that there is serious excess capacity in the economy, and that private consumption is only 30 percent of economic activity. Professor Lang said that beginning this July, the Purchasing Managers Index, a measure of the manufacturing industry, plunged to a new low of 50.7. This is an indication, in his view, that China’s economy is in recession.

Fourthly, that the regime’s officially published GDP of 9 percent is also fabricated. According to Professor Lang’s data, China’s GDP has decreased by 10 percent. He said that the bloated figures come from the dramatic increase in infrastructure construction, including real estate development, railways, and highways each year (accounting for up to 70 percent of GDP in 2010).

Fifthly, that taxes are too high. Last year, the taxes on Chinese businesses (including direct and indirect taxes) were at 70 percent of earnings, with the individual tax rate sitting at 81.6%.

Once the “economic tsunami” starts, the regime will lose credibility and China will become the poorest country in the world, according to the Professor.

There seems to be some agreement with the professor’s remarks.

Professor Frank Xie at the University of South Carolina, Aiken, said that the idea of China going bankrupt isn’t far-fetched. Major construction projects have helped inflate the GDP, he says. “On the surface, it is a big number, but inflation is even higher. So in reality, China’s economy is in recession.”

Li Keqiang, Vice Premier of China: doesn't always believe the stats

Further, Xie said that official figures shouldn’t be relied on. The regime’s vice premier, Li Keqiang for example, admitted to a U.S. diplomat that he doesn’t believe the statistics produced by lower-level officials, and when he was the governor of Liaoning Province “had to personally see the hard data.”

However, there are those that do not fully agree that Beijing is being totally deceptive about its economic wellbeing.

In his recently book Understanding China’s Economic Indicators: Translating the Data into Investment Opportunities, Wall St Journal writer Tom Orlik defends the National Bureau of Statistics of China (NBS), who he says aren’t misrepresenting the truth as much as some would believe.

The real issue, he believes, comes from two things.

First is the manner of figure presenting: quarter on quarter, rather than year on year, which can hide volatility.

Second, in technical weaknesses generated in the gathering of the data. Unfortunately, much of these weaknesses come from being forced to rely in part on the provinces, where data manipulation is all too common. The result is therefore a gulf in the official Beijing figures and what analysts come up with if they add all the provincial data together.

To put this in context, the difference between the centralised GDP figure for China and the figure attained by studying the regional statistics is greater than the GDP of Switzerland. As Orlik puts it, “Shame on the Swiss for having an economy smaller than a statistical blip in China”.

Chinese shopping: dearer than they say

That said, Orlik acknowledges that the Government is quite happy to alter or even dismiss some bad news stats.

Agreeing with Professor Lang, Orlik believes that the real inflation figure is much higher than the NBS would prefer people to believe. After all, a common Chinese saying is “Do statisticians buy groceries?” meaning that the official rising cost of food and other goods bears no relation to what shoppers are seeing on the streets.

Another hole in the national inflation figure is that house prices are not included. If they were, the NBS would use official figures, but even these seem to be fictitious: Orlik has calculated a house cost increase of 220% in Shanghai alone since 2006, a slightly different figure to the 20% figure published by the Government.

Away from the legitimacy of the NBS figures, Orlik sheds light on several problems that the Chinese economy is currently having.

For the first time in modern history, power is shifting from the employer to the worker. This is partly the effect of the one child policy, which means that the available workforce is plateauing: it is said that for every young couple there are 4 old people to look after, which if true is a worrying trend.

This demographic shift means that wages continue to increase, damaging the competitiveness of Chinese goods and making other countries potentially more attractive for manufacture. Some clotheses factories are already moving to less developed countries, like Nigeria.

Overall therefore, China is not in as rosy an economic situation as some commentators – both Western and Asian – might have you believe. There are key structural issues which need to be addressed, and soon if a hard landing of the economy is to be avoided.

The question though is whether these structural problems are as worrisome as Professor Lang states. If not, then there is good cause for optimism about China in the coming years. If yes, then the Eurozone’s current crisis could be quickly overshadowed by something with far more potential to damage the world.

Research: measuring Chinese consumer confidence

18 Oct

A few weeks ago the Economist published an article asking readers to submit an alternative to their famous Big Mac index, which, if you are not familiar with it, is described as “an informal way of measuring the purchasing power parity (PPP) between two currencies and provides a test of the extent to which market exchange rates result in goods costing the same in different countries”. The article rooted out a reader’s suggestion that tested more than just PPP, but economic confidence too.

Being able to measure economic confidence is a good way to understand where an economy is going. The suggestion to the Economist was to measure the amount of times “gold price” was Googled, using Google Insights. As the article notes, this search tag does not follow the gold price itself. “For example, when the world’s financial system was melting down, the gold price tumbled yet the number of gold-price searches soared. The number of gold price searches shoots up when households perk up again (see chart right). This makes it a handy device for spotting turning-points in economic confidence, with the added advantage that the data are available earlier for conventional survey based figures.” The article signs off by noting that “Worryingly, the number of [US] searches [for gold-price] has recently vaulted above its 2008 peak, signalling the possibility of a double-dip”.

Why does this matter? Well, consumer confidence is a critical factor in the peaks and troughs of national economic success. One paper from a few years ago actually worked out that “consumer sentiment accounts for between 13 and 26 percent of the innovation variance of GNP [Gross National Product]“. As buying gold is a traditional way to invest during bad economic times, then theoretically the more people who look at buying it then the more people worried about the state of the economy.

So if you see searches for gold price going through the roof, as is happening with the US data now, then the theory goes that the national economy is not going to be in the best of health moving forward.

Let’s have a look then, given the subject matter of this blog, with the number of gold price searches for China versus the West. It is important to note at this point that there are some factors that make this comparison not the most accurate: cultural attitudes to gold as a safe haven; Google is not the most popular search engine in China (Baidu is); and economic literacy and access to economic news is not the same in any of the countries, thus potentially skewing consumer confidence figures. However, I have tried to make it more even by using the Chinese words for “gold price”, 黄金价格 as the term for the China search. So overall it still makes an interesting comparison*:


The result is very striking indeed. The US, UK, Australia and China are all strongly correlated, and in all countries gold-price searches have surpassed 2008’s levels: double dip may be on the way, at least in the eyes of consumers.

The fact that China has a similar result to the Western countries here is probably down to one of two things. The first choice is that searches for gold price in Chinese do not reflect economic confidence, and are coincidentally aligned with the other countries. The other option is that Chinese confidence has taken a dip similar to that elsewhere.

On the surface this may appear strange. China’s latest quarterly GDP growth figures show a rate of 9.5% change on a year ago (compared to 1.6%, 0.6% and 1.4% for the US, UK and Australia respectively). But it is other data that is troubling the Chinese consumer, especially inflation, which was at 6.2% for August. Importantly, this inflation figure is not trusted by the majority of local consumers, who, anecdotally, see food prices rising by many times this figure. And it is also worth mentioning that the 6.2% does not include house prices, which are estimated by Wall St Journal writer Tom Orlik to have risen 220% in the last 5 years in Shanghai alone. No wonder there is a Chinese expression that asks, “Do statisticians buy groceries?”

In short, the official data out of China is not necessarily a teller of the whole story. (A post about this will be posted shortly – make sure you subscribe to receive it.) Which is why the gold-price search data is so interesting, because it shows consumer confidence to be as low as in the West. So, overall, a potentially useful tool for investors. Let’s watch this Google space.

*P.S. the charts presented here are not as crisp as I would like them because does not seem to support the direct embedding of Google Insights data. If any reader knows how to marry the two then please get in touch.


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