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.