China's Growth an Accounting 'Miracle' 37 comments
an article to
-
Font Size:
-
Print
- TweetThis
Now we are learning how China has achieved its “miracle growth.” The country showed positive GDP growth while its electricity consumption declined in the beginning of 2009 – creative accounting that makes Enron’s accountants appear as dilettantes. A paper published by John Makin at American Enterprise Institute explains it well:
Once China had announced its 8 percent growth target, it began to disburse funds directed at a sharp increase in public works spending. It is important to understand that the disbursal of funds is recorded as GDP growth. So the government can easily control the pace of growth by the pace at which it releases funds that have already been allocated in the stimulus package to the creation of higher production or growth numbers. Funds disbursed for fixed-asset investment by state-owned enterprises or provincial governments are counted as having been spent when they are disbursed. In fact, the funds go out to the state-owned enterprises and provincial governments and may be held until actual projects are identified and undertaken.
But wait, it gets worse:
…Ambitious planners count shipments [consumer products] as retail sales while end-use demand may be absent. In such cases, the “sales” are made to happen by virtually giving away the products that have already been produced and counted as GDP growth.
I am not convinced if China will have inflation in the long-run. It appears that deflation is a more likely scenario as China is ridden with overcapacity – the country was geared for much higher global growth. I can, however, see inflation erupting in a very short timeframe as money has been thrown at the consumer/companies, and we are seeing this in the stock market and real estate. But in the long run, inflation appears an unlikely outcome: overcapacity and slower demand from the US and Europe will force Chinese producers to cut prices to increase utilization and stimulate demand.
Lately, we’ve started hearing whispers of the Chinese renminbi contending for the status of the world’s reserve currency. On the surface it more or less makes sense. The US is struggling and Europe has structural problems. John Mauldin correctly put it, “EU was designed for prosperity not for adversity.” It will be hard for the EU experiment to survive in the long run. But that’s a topic for a different discussion.
China on the other hand is chugging along. I heard (though not confirmed) the Chinese stock market now has a greater market capitalization than Japan’s. Though the Chinese economy has the size of a global currency contender, it lacks one not-so-little element that the global economy will require for renminbi to become the world’s currency – political stability. We forget that China is still not a democracy. I am not sure what to call the political system of the People’s Republic of China but I don’t think it’s the “people’s” nor is it a “republic.” The rule of law is a nascent concept in China. Something is only legal if the government thinks it is legal.
And finally, I’m sure China doesn’t want the renminbi to be the world’s currency as it would drive up the value – a suicide for an export-based economy.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
David Fry
-
2
TraderMark
-
3
Don Dion
-
4
Cliff Wachtel
-
5
Mike Havrilla
Top Instabloggers » -
1
-
Top StockTalkers
Top
StockTalkers.-
1
David Fry
-
2
Cliff Wachtel
-
3
Mike Havrilla
-
4
David White
-
5
Hedged In
Top StockTalkers » -
1
On Aug 10 02:05 AM Fighting Yoda wrote:
> Agree with the author on China accounting issues - there is a lot
> of smoke and mirrors, but that same problem exists everywhere most
> specifically in US too.
>
> China bulls somehow forget the market had very recently crashed by
> 75% (yes 75%). If everything is so very real there then why the super
> major crash.
On Aug 09 10:51 PM storm999 wrote:
> I think legal unions, wage laws and have a lot more to do with it
> than business cycles. We had lots of collapses in the 1800s. What
> created the middle class was good wage jobs in 50s. Since 1980 when
> Reagan got in real wages have flattened, especially for men and manufacturing
> jobs have shipped overseas.
>
> China literally has slave labor and the legal labor is drastically
> exploited. They can have a lot of consumption from their managerial
> class but the common people are still subsistence level. They are
> literally tank fodder. The Chinese won't even let people practice
> Falung Gong.
On Aug 09 10:41 PM storm999 wrote:
> You have hit the nail on the head. I have written several comments
> and blogs about why the RMB won't become the new reserve currency,
> not the least of which is they don't want it to.
>
On Aug 09 07:23 PM robert.b.ferguson wrote:
> Creative destruction is indeed one portion of the capitalist formula,
> something we seem to have lost sight of recently. Another is transparency,
> a property completely lacking in Russia which prohibits me from investing
> there. While China has greater transparency than Russia and I do
> hold positions in Suntec Power Holdings (seekingalpha.com/symbo...)
> and Agrifeed (seekingalpha.com/symbo...) I still harbor
> reservations about further deployment of capital there. While China
> has not earned the reputation for abusing investors that Russia and
> Venezuela have I won't rule that out if the chips are down.
On Aug 09 02:21 PM Road Runner wrote:
> Looks like accounting monkey business in China.
>
> Do you have an idea of how much this "creative" accounting skews
> that actual GDP number? In my mind, that's the key here.
1785 - Noon - high point of economic expansion
1794 - Dusk - Negative Energy wins
1803 - Midnight - high point of economic contraction
1812 - Dawn - Positive Energy wins
1821 - Noon - high point of economic expansion
1830 - Dusk- Negative Energy wins
1839 - Midnight - high point of economic contraction
1848 - Dawn - Positive Energy wins
1857 - Noon- high point of economic expansion
1866 - Dusk - Negative Energy wins
1875 - Midnight - high point of economic contraction
1884 - Dawn - Positive Energy wins
1893 - Noon - high point of economic expansion
1902 - Dusk - Negative Energy wins
1911 - Midnight - high point of economic contraction
1920 - Dawn - Positive Energy wins
1929 - Noon - high point of economic expansion
1938 - Dusk - Negative Energy wins
1947 - Midnight - high point of economic contraction
1946 - Dawn - Positive Energy wins
1965 - Noon - high point of economic expansion
1974 - Dusk - Negative Energy wins
1983 - Midnight - high point of economic contraction
1992 - Dawn - Positive Energy wins
2001 - Noon - high point of economic expansion
2010 - Dusk - Negative Energy wins
2019 - Midnight - high point of economic contraction
2028 - Dawn - Positive Energy wins
On Aug 09 10:51 PM storm999 wrote:
> I think legal unions, wage laws and have a lot more to do with it
> than business cycles. We had lots of collapses in the 1800s. What
> created the middle class was good wage jobs in 50s. Since 1980 when
> Reagan got in real wages have flattened, especially for men and manufacturing
> jobs have shipped overseas.
>
> China literally has slave labor and the legal labor is drastically
> exploited. They can have a lot of consumption from their managerial
> class but the common people are still subsistence level. They are
> literally tank fodder. The Chinese won't even let people practice
> Falung Gong.
On Aug 10 02:56 AM Michael Clark wrote:
> In place of 'Positive Energy" one might use the idea of 'Construction
> (Erection)". And, in place of 'Negative Energy' one might use the
> idea of 'De-Construction (Sterility)'...the phallic references being
> intentional. Day-Cycles show higher birth rates; Night-Cycles show
> lower birth rates and much more gender confusion generally.
Dualism, as a philosophical foundation, is based on the same systems used by Pythagoras, Plato, Goethe, Jung actually many of the great thinkers of the world, but one that has been forgotten or dismissed, as the logic system of causality has taken over the world with the dominance of science.
It is true that the poetic mind thinks differently than the scientific mind. The crux of the view, in terms of the economy, is that there are 'days' of economic expansion and 'nights' of economic contraction...and all the other causes and effects flow between these primordial 'poles'.
On Aug 10 03:32 AM Dave Wrixon wrote:
> This demonstrates why arguing with Americans is pointless. They usually
> operate in a universe with a totally different logic system to the
> rest of us.
On Aug 10 03:32 AM Dave Wrixon wrote:
> This demonstrates why arguing with Americans is pointless. They usually
> operate in a universe with a totally different logic system to the
> rest of us.
On Aug 09 06:37 PM Robert Martorana wrote:
>
> Vitaliy:
>
> Thanks for shedding light on an issue the mainstream media are overlooking.
>
>
> I agree that China is faking its numbers, and Michael Pettis has
> made the same point in articles on July 24 and on August 3.
> ______________________...
> July 24:
> seekingalpha.com/artic...
>
> August 3:
> seekingalpha.com/artic...
>
> ______________________...
>
> China's economy has alarming parallels to the U.S.: Weak domestic
> demand, gargantuan levels of monetary and fiscal stimulus, a real
> estate bubble hidden in plain sight, exaggerated levels of employment,
> legions of unemployed college graduates, and the prospect of stubbornly
> higher inflation down the road.
>
> As you noted, China is NOT a democracy. Fortunately, the Internet
> is shedding light in dark places. Michael Pettis recently noted that
> Chinese Internet users mock government claims of 12.9% income growth.
> "Hey! I just got a raise!" This echoes sarcastic bloggers in the
> U.S. "Hey! I'm really not unemployed!"
>
> If wishes were horses, beggers would ride.
>
> Thanks again,
> Rob
news.xinhuanet.com/eng...
" The slowing demand was mainly contributed by the industrial sector, according to CEC data. About 3.43 trillion kilowatt-hours of electricity was used by the industry last year, up 3.83 percent from a year earlier, slower than the overall social power consumption growth rate for the first time.
Electricity used by the service industry and the rural and urban residents continued rapid growth, as the group was less affected by the financial crisis. "
There. The switch from export oriented economy to an internally facing one boosts "Service" economy and shrinks the exporting factories. This will cause a dip in raw electricity demand, when in face, the service sector's electricity use is growing very rapidly.
The truth is probably somewhere in the middle of the two bias.
What happened to USA's switch from manufacturing to to service economy happened over decades, China is having to do it in a few years; hence electricity supply/demand didn't have a chance to adapt.
GDP can grow despite electricity decline, precisely because of the switch to internal demand; as well as infrastructure construction, which doesn't take as much electricity as factories. Check the demand in raw concrete, copper and steel to see the truer picture.
The recovery is not all fake.
Vitaliy, here you have it exactly wrong. The rule of law is very strong in China, and has been since Mao Zedong. What China lacks is freedom, democracy, free speech, and any sort of substantial cultural diversity.
No question in my mind why China is doing so well exporting their stuff to us. And, surely sometime in the future, some will actually be worth buying, but not quite yet. Remember after WW2 when Japan made fold-tab metal toys with the same engineering that cutout paper dolls have?
Now look at the quality Japan produces. Equal or only slightly behind Germany as the best in the world. China may do the same thing not too far off.
1) electricity generation is due to industry shift, especially steelmakers shutting down for extended times in 2009. (remember the iron ore thing? yah...)
2) Democracy - I like democracy. But the fact of the matter is it's not proven that a fractured democracy that takes months on policy and then finally bends to populist pressure is better than an educated autocracy. The chinese leadership is the most well educated leaders in the world atm (6 of the 9 are engineers and scientists, many are professors). at this point, it wouldn't be too much of a stretch to call China a Technocracy. This is what scares me most. While our politicians are yelling slogans and dragging each other down for votes, the Chinese are taking quick decisive action based on facts and figures. (take a look at what Jim O'Neill of Goldman Sachs says about the china stimulus, they're basically showing us how it's done!)
Native Beijinger's who can't or won't afford the Western designer labels merely go to Silk Market and ask for the top quality product, price is no object.
In short, if you shop at WalMart, you get what you pay for.
On Aug 10 12:13 PM bobbobwhite wrote:
> A woman I know got her CA resale license in anticipation of opening
> a small shop business(one of those cute crap "gift" shops you see
> everywhere packed full of Chinese-made junk).
On Aug 10 06:47 AM dividendmachine1 wrote:
>
>
> as long as a large base of consumers will buy their worthless but
> tempting goods
>
On Aug 09 06:37 PM Robert Martorana wrote:
>
> Michael Pettis has
> made the same point in articles on July 24 and on August 3.
> ______________________...
From a fairly neutral point-of-view, it would seem that most of the commenters have conveniently missed the fact that Western governments skew, massage & manipulate figures to suit their political stance all the time.
Name calling & finger pointing belong in the playground ...