Chinese Growth Hardly a Basis for World Economic Recovery 10 comments
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Thinking more about the Chinese statistical issues that I wrote about on Thursday brought to mind my posts on the “stimulus” package and Keynesian economics. A major theme of those posts was that massive government spending could raise measured GDP, but that the real value of the output created through such programs could fall far short of the recorded value. Just because the government spends $100 billion doesn’t mean you’d get anything anyone would be willing to pay $100 billion for. Keynesian accounting is based on the fallacious notion that there is some homogenous stuff called “output,” and the loss of $100 of private output can be offset by a $100 of government spending/output.
This seems to fit China to a “T”. China has undertaken a massive stimulus, drawing down a decent chunk of the nation’s savings to pay for all sorts of infrastructure projects, and other things. This allows China to record GDP figures that match its forecast of 8 percent growth at the same time that its output of private goods and services (a very large fraction of which were exported) has declined due to the economic problems in the nations to which China exports.
And the very fact that China has achieved this 8 percent growth target almost exactly, despite plunging exports, is the very thing that raises my skepticism. The “aha” moment came in a phone call with a friend, who spends one month of every 4 in China. I asked him about the economy, and he indicated how the government was trumpeting the meeting of the growth target. I immediately had flashbacks to companies that met earnings targets quarter after quarter, like clockwork, only to have it revealed subsequently that this was achieved through accounting legerdemain.
China’s government can effectively do the same thing. A yuan of government spending increases measured GDP by a yuan, even if it is spent on a project that generates no economic value. It may generate political value, however, as a nervous Chinese government is anxious to spend to prevent social unrest.
And that’s a reasonable calculation for the Chinese government to make. My concern is that many of the forecasts (and hopes) about an economic rebound in the US, Europe, and Japan are based on Chinese growth (and growth in other emerging markets) dragging the rest of the world along with it. If reported Chinese GDP growth is driven primarily by government expenditure on dubious projects–and many of those in non-tradeables–it is quite difficult to see how these hopes can be realized. It is unlikely that Chinese consumers are going to dramatically change their spending habits, especially in times of economic uncertainty; it is also unlikely that Chinese consumers are going to increase their demand for non-Chinese consumer goods; and it is further unlikely that recorded growth based on increases in government expenditure is going to lead to increased demand for Western- or Japanese- produced investment goods. So just how is the Chinese stimulus going to be converted into increased demand for non-Chinese products?
In brief, it seems to me that a crude Keynesian focus on economic aggregates is preventing people from assessing critically China’s actual ability to spur economic growth not just in China, but in the world at large. It is highly likely that Chinese growth is largely chimerical, and that such chimerical growth is hardly the basis for a recovery in the world economy, especially given the export-driven nature of China’s recent growth.
So, apropos my earlier posts, just as I was extremely skeptical that stimulus spending in the US would generate an economic recovery here, it seems to me that reported Chinese growth is a very weak reed on which to base hopes for an economic recovery in the US, Europe, Japan, or elsewhere in the world.
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This article has 10 comments:
When I see US consumption numbers and consumer sentiment figures change for the better in a significant way then I will believe that a real expansion is underway here at home. In the meantime I do not put much stock in a Chinese led economic recovery.
The real recovery will be policy led and originate domestically. But that time is not here yet. China is not our saviour nor our knight on a white horse.
China's export driven economy in particular is at risk when dollars dry up on this side of the pond. The real outcome of our recession will result in lower wages across Asia as companies there seek to maintain customers and remain competitive. The implication of course is that China can not lead us all out of the recession. In particular, as savings there increase due to insecurity and jobs are lost in the manufacturing sector then their own domestic consumption numbers should slip.
The BRIC may hate US Dollar dominance but they cannot seriously entertain a reserve currency of their own until they can prove that their own population will turn from savers to consumers and drive the economy internally.
If Asian countries cannot boost consumption internally then they risk being the Caboose on the train and will never achieve more than being a service to Western wants, needs and demands. They cannot pull us out of recession any more than we can make gold from lead bars.
The US is only useful to China as a consumer of China's goods.
As much as we think US GDP numbers are manipulated, China's are more manipulated.
On Jul 13 02:49 PM cameroni wrote:
> Good points Craig. If we all just suspend our beliefs we can imagine
> that somehow China with it's deliberately manipulated figures for
> growth and GDP and a managed Renminbi held artificially low to dollars
> will somehow magically pull the globe out of this trade contraction.
> Export numbers from China are at odds with US trade import figures
> too confounding the whole discussion. If we lie to ourselves enough
> it will become truth apparent though.
>
> When I see US consumption numbers and consumer sentiment figures
> change for the better in a significant way then I will believe that
> a real expansion is underway here at home. In the meantime I do not
> put much stock in a Chinese led economic recovery.
>
> The real recovery will be policy led and originate domestically.
> But that time is not here yet. China is not our saviour nor our knight
> on a white horse.
1. Stop buying Treasuries.
2. Sell their existing Treasuries
Point 2: (To Author of article and Cam)
China is also printing a large number of Yuan and trying to reflate their currency. Their is no such thing as a global safe currency.
However, I believe that Keynsian spending will go farther in China than in US
On Jul 13 03:41 PM cameroni wrote:
> The BRIC may hate US Dollar dominance but they cannot seriously entertain
> a reserve currency of their own until they can prove that their own
> population will turn from savers to consumers and drive the economy
> internally.
>
> If Asian countries cannot boost consumption internally then they
> risk being the Caboose on the train and will never achieve more than
> being a service to Western wants, needs and demands. They cannot
> pull us out of recession any more than we can make gold from lead
> bars.
My Chinese etfs though haven't done so well in the last month so that's more substance that 'decoupling' isn't happening and the USA is still pivotal to the world's growth...or lack of ... not China.
arabianmoney.net/2009/.../
Cameroni,l it is not at risk as the shortage of exporting opportunities is overcome by influx of government's money... exporters are in danger, yes, but not economy at whole.
Otherwise I agree with you that it is a short term measure and if not followed up with more measures that provide incentives for increased domestic consumption it will be effective only for these two years.
Peter, why is China rushing straight into its own version of the US sub-prime crisis? Cannot open the link. There are no indications that the loans are being offered wantonly and will not be serviced.
Regs, Dragan