The Simple Math of 'Staggering' Chinese Growth

Chinese non-export economy grew 23% in June! Before you start googling for that number, let me warn you. You won’t find it. I’ve computed it using fifth grade math.

Here is what we know: exports constitute about 35% of the Chinese economy and they dropped over 20% in June, while the Chinese economy (GDP) grew 8%. So the “X” is the growth rate of 65% of Chinese non-export economy.

0.35 x (-20%) + 0.65 x (X%) = 8%. If you were to solve for X you get 23%.

Enough with math, let me put this number in perspective. Chinese non-export economy grew at 3 times the rate of their GDP. I only have two, very contradictory, explanations for this:

1) The Chinese government is lying through its teeth about its economic miracle growth. It has the incentives to interrogate economic data until it confesses to the party line numbers. This is very plausible, as for months, the Chinese government was showing positive GDP growth while its consumption of electricity was declining. Obviously this doesn’t make much sense. China is not famous for production of intellectual type goods (i.e. software, creation of toxic financial products – that is our specialty) which scale a lot better and don’t require proportional electricity consumption to grow GDP. China makes stuff and to make stuff you need a lot of electricity. Also, even if the growth is completely driven by building high story buildings (even if they collapse), highways, schools - these activities still require a lot of electricity.

2) The numbers are real, the monetary base was up 28.5% in June (again if you can trust that number) and thus the quality of growth is horrible. I’ve discussed this scenario in great detail.

I hate to leave on open-ended note, but only time will tell what is actually going on in China.

P.S. I was not surprised to learn that Jeremy Grantham of GMO – a value investor for whom I have a tremendous respect is concerned about the future of Chinese economy as well.

Authors Note: I made a mistake with some of my assumptions in this article, I've corrected it here.

Comments

[Graham and ...:]

Reminds one of "steel" production in "backyard" ("blast") furnaces erected in people's back yards during the "Great Leap Forward" in the 1950s. Tear down the existing infrastructure, feed the material through the "socialist" furnaces, and double "steel" output, while lowering its quality and value.

Jul 29 08:49 AM

[toadhall2:]

Bad math Vitaliy. Chinese exports may be 35% of their economy but the chinese contribution or "value added" is not 35%. China is the final assembly point for many products but the Chinese contribution is minimal in dollar terms. For example if china exports an Ipod at say $100 it may have contributed less than $10 of labor and components yet the full $100 is counted in your math. To get an idea of the distortion this causes look at Hong Kong where exports are 180% of GDP.

Jul 29 09:08 AM

[coreopsis:]

Bad logic Vitaliy. Perhaps there is an area (online gaming?) where your expertise can be more fully evidenced?

Jul 29 09:57 AM

[Susan Weerts:]

It has been pointed out by the Economist magazine in June, too, that the consumption in of electricity is the better gauge of its economics growth.

As in the “value added” argument by toadhall2, this value-added most likely occurs outside the mainland China, such as Hong Kong, Taiwan, Singapore, New York and etc. GDP will record $10 produced for export section (a meek $2-5 profit for the assembly factory) as well as additional $5-10 service fees for the middleman inside the mainland China. You just don't count in the final sale price towards Chinese GDP, in this case the full $100.

Jul 29 10:03 AM

[johnqh:]

Bad number.

The NET export contribute to the GDP, essentially the trade surplus, not gross GDP.

The trade surplus decreased a little over 2% over H1 2009 (I don't have the number to break down by Q or month). Export down 20%, but import down about 25%.

Jul 29 10:37 AM

[Neil459:]

Believing anything from a Communist Dictatorship is akin to betting on horses. Everything you think you know can disappear in an instant.

Jul 29 12:38 PM

[HCSKnight:]

Sorry, guys it's not bad math.... it's pure and simple bad thinking. Mr. Katsenelson's failures are simply an all too common reflection of the failure of the US educational system. No definition of terms, and or improper definition of terms. Without this all else which follows is mere rumination.

Sadly, Mr. Katsenelson seems to be in a position to continue to influence such poor intellectual rigor; >> Vitaliy N. Katsenelson is ... an author of Active Value Investing: Making Money in Range-Bound Markets ... an adjunct faculty member at the University of Colorado at Denver, Graduate School of Business where he teaches Practical Equity Analysis and Portfolio Management class ... a regular contributor to the Financial Times and Forbes; wrote articles for Barron's, BusinessWeek, The Rocky Mountain News, Financial Planning Magazine and many other financial publications (TheStreet.com, The Motley Fool, Minyanville.com, MarketWatch. ....

But hey, a guys got to make a buck right?....

HCSKnight

Jul 29 02:03 PM

[Susan Weerts:]

Since you are such an intellect, why do you spare some more words than just attack?

Jul 29 10:42 PM

[Michael Clark:]

The Chinese economy: a lot of smoke and mirrors and bad products. Buildings that collapse; food with poison embedded to make it prettier and last longer; viagra stuffed with dry-wall. Western communists are truly DESPERATE that they have to embrace such a false case of state capitalism as their saviors. MANY world economists laugh and shake their heads when looking at Chinese government economic statistics. Those statistics are for 'public consumption' and serve as a face-saving device. A lot of money is being thrown around to try to stimulate the economy...especially money is being thrown at real estate, the stock markets, the auto industry. But only American and European consumption is going to lead to an opening of the factories to produce worthless garbage we love to consume. That's why the riots are continuing in China.

What is true in China? Business is a magic show: three sets of books for every company, one for the tax man (showing low profits), one for the bank (showing steady profits), and one for management (showing wonderful profits)...which makes it a bit hard to really know what is true.

Jul 30 02:16 AM

[Michael Clark:]

Editorial note: the above should read:

The Chinese economy: a lot of smoke and mirrors and bad products. Buildings that collapse; food with poison embedded to make it prettier and last longer; viagra stuffed with dry-wall. Western CAPITALISTS...

Jul 30 02:17 AM

[coreopsis:]

In total agreement. Once you get away from the elite universities in the States, it's a frightening morass of illogic and misinformation. As for the business press, nothing exemplifies the 'leverage' that the US financial system holds over the 'minds' [sic] of Americans. The business press is 95% blather, supported by an advertising base of banks, investment companies and their lackeys (V). Truly, these leeches have drawn a veil over the corruption that is at the heart of US capitalism. The US...where all the investment funds have returns 'above average',


On Jul 29 02:03 PM HCSKnight wrote:

> Sorry, guys it's not bad math.... it's pure and simple bad thinking.
> Mr. Katsenelson's failures are simply an all too common reflection
> of the failure of the US educational system. No definition of terms,
> and or improper definition of terms. Without this all else which
> follows is mere rumination.
>
> Sadly, Mr. Katsenelson seems to be in a position to continue to influence
> such poor intellectual rigor; >> Vitaliy N. Katsenelson is ... an
> author of Active Value Investing: Making Money in Range-Bound Markets
> ... an adjunct faculty member at the University of Colorado at Denver,
> Graduate School of Business where he teaches Practical Equity Analysis
> and Portfolio Management class ... a regular contributor to the Financial
> Times and Forbes; wrote articles for Barron's, BusinessWeek, The
> Rocky Mountain News, Financial Planning Magazine and many other financial
> publications (TheStreet.com, The Motley Fool, Minyanville.com, MarketWatch.
> ....
>
> But hey, a guys got to make a buck right?....
>
> HCSKnight

Jul 30 09:09 AM

[Vitaliy Kat...:]

Authors Note: I made a mistake with some of my assumptions in this article, I've corrected it in this artice "China's Staggering Growth: Reappraising My Original Position"

Jul 30 04:20 PM

[Michael Clark:]

It's a culture of salesmen. That means, lying is ok, in the name of sales, sales, sales. Willy Lomen is back!


On Jul 30 09:09 AM coreopsis wrote:

> In total agreement. Once you get away from the elite universities
> in the States, it's a frightening morass of illogic and misinformation.
> As for the business press, nothing exemplifies the 'leverage' that
> the US financial system holds over the 'minds' [sic] of Americans.
> The business press is 95% blather, supported by an advertising base
> of banks, investment companies and their lackeys (seekingalpha.com/symbol/v).
> Truly, these leeches have drawn a veil over the corruption that is
> at the heart of US capitalism. The US...where all the investment
> funds have returns 'above average',

Jul 30 09:10 PM

[Graham and ...:]

Mr. Katsenelson was educated overseas (Russia), meaning that his failings (or merits) do not pertain to the U.S.educational system.


On Jul 29 02:03 PM HCSKnight wrote:

> Sorry, guys it's not bad math.... it's pure and simple bad thinking.
> Mr. Katsenelson's failures are simply an all too common reflection
> of the failure of the US educational system. No definition of terms,
> and or improper definition of terms. Without this all else which
> follows is mere rumination.
>
> Sadly, Mr. Katsenelson seems to be in a position to continue to influence
> such poor intellectual rigor; >> Vitaliy N. Katsenelson is ... an
> author of Active Value Investing: Making Money in Range-Bound Markets
> ... an adjunct faculty member at the University of Colorado at Denver,
> Graduate School of Business where he teaches Practical Equity Analysis
> and Portfolio Management class ... a regular contributor to the Financial
> Times and Forbes; wrote articles for Barron's, BusinessWeek, The
> Rocky Mountain News, Financial Planning Magazine and many other financial
> publications (TheStreet.com, The Motley Fool, Minyanville.com, MarketWatch.
> ....
>
> But hey, a guys got to make a buck right?....
>
> HCSKnight

Sep 01 03:34 PM