Official Growth vs. Actual Growth

Now that the Chinese authorities have announced that the country’s official growth rate for 2015 was 6.9%, I was relieved to find that Peter Martin’s take in the Sydney Morning Herald is so close to mine:

Its target growth rate is 7 per cent. Its official growth rate, released on Tuesday, is almost exactly the same, 6.9 per cent, suggesting either that China’s leaders are incredibly good at meeting targets, or that their frightened underlings are good at leaning on the figures to make it look as if they are.

The first is unlikely, given the leadership’s spectacular failure to get what it wants out of its own sharemarket, the world’s biggest. The Shanghai composite index plummeted 15 per cent at the start of the year, despite frantic efforts to prop it up.

What’s happening to the share index isn’t that important, except as an insight into a bigger game being played out on a larger canvas.
“Countries are like people,” says Patrick Chovanec, chief strategist at Silvercrest Asset Management in New York. “People do what works until it stops working, and then they keep doing it, because it used to work.”

China latched on to something that worked. Appallingly underdeveloped with embarrassingly low local purchasing power, it turned that weakness into a strength. Like Japan, South Korea and Singapore before it, used its low wages to tap into the rest of the world’s purchasing power. As as it sold more and more cheap goods it invested the proceeds in more and more factories and housing. It was bringing hundreds of millions of workers in from the country to cities.

As the number of its factories and housing units grew, its need for the rest of the world to buy even more of what it made grew; which it did, enabling China build even more factories and more accommodation, mostly with Australian iron ore.

Until China grew to the point where it dwarfed the economies it sold things to. On one measure it is now the world’s biggest economy, on another the world’s second-biggest. With the rest of the world unable to keep buying increasing amounts of what it produced it needed to try something different. It needed to let the growth rate slow and allow the spending of ordinary Chinese drive the economy.

It paid lip-service to the idea, but mostly it kept doing what it used to do.

If building more factories and accommodation had boosted growth before, surely it would do it again, its logic went. And it worked during the global financial crisis, sort-of. Its economy kept growing while the rest of the world’s stumbled.

But the rest of the world never really recovered, and China kept building increasingly useless factories and increasingly empty housing.

I’m not sure which is harder—forecasting China’s GDP growth rate for 2016 or figuring out what its actual growth rate was for 2015. Few believe the official numbers, presumably including the Chinese. If Mr. Martin’s figure is correct, that’s concerning for several reasons. Actual contraction would be bad enough but a nearly eight point gap between official and actual would suggest that official China is going off into Fantasyland even more than usual. I’m not sure how you can ever return to reality from that great a separation.

As Patrick Chovanec notes in the remainder of the SMH article, the Chinese authorities have mounted a tiger that they dare not dismount. In his words “they want a correction without having a correction”. I think they’ll be disappointed.

The one thing that I think is missing from Mr. Martin’s account of China’s rise is that it rose by beggaring its customers. China exported low cost goods and imported employment. We and China’s other customers did the opposite. In the United States that meant that people bought a lot of stuff, some borrowing (or dis-saving) to do it, those in the highest income brackets got a lot richer, and those who depended on an industrial America for their livelihoods lost their jobs.

That would have been bad enough but people living in countries in the next income tiers like Mexico did the same and people living in countries that would have liked to have climbed out of their holes in the same way that Japan, South Korea, and China have find it much harder to do so. China climbed the economic ladder and pulled it up after them.

There are 1,001 other implications for China’s growth and, now, its relative stagnation. Did the Europeans actual reduce net carbon production or did they just move it to China, safely out of sight and beyond control?

I can also list 1,001 things that the Chinese authorities should do but I can’t for the life of me imagine their doing any of them. For example they need to divest state-owned enterprises (as the Reuters article linked above points out). They need to make their banking system less opaque and much, much less government-controlled with the foreign ownership they committed to when they joined the WTO. They need to let their currency trade. If they want to stimulate their economy, they should give money to people rather than to state-owned businesses and discourage saving. They should discourage wealthy Chinese from sheltering their gains in foreign real estate. The list goes on but, as I said, I can’t imagine their actually doing any of them.

The remaining question is just how hard China’s hard landing is likely to be.