China
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Madoff-like returns. The nonpartisan American Enterprise Institute (AEI.org) just issued an interesting report titled “China:
Bogus Boom?” in which it analyzes China’s economic growth. On July 15, China reported a 7.9% GDP growth rate for Q2
2009, which is in line with its 8.0% goal and much better than the sharp decline felt in most of the rest of the world. This
growth was credited to the December 2008 stimulus package worth about 14% of GDP. The stimulus package was targeted at
boosting domestic demand as exports fell (down 21.2% in June). While the Morning Coffee has long been sceptical of official
Chinese economic statistics, this AEI report highlights how the GDP calculations which do not necessarily represent the true
state of the economy. China’s economic statistics are based on recorded production activity, rather than being a measure of
expenditure growth—defined as the sum of consumption, investment, government spending, and net exports—as in the U.S.
According to this article, the disbursal of funds is recorded as GDP growth. So the government can easily control the pace of
official growth: “Funds disbursed for fixed-asset investment by state-owned enterprises or provincial governments are counted
as having been spent when they are disbursed”. Under the same convention, “Shipments to retailers are counted as retail sales
on the apparent assumption that ultimately all goods shipped will be sold at some point in the future”. Leading apparently to the
situation where the government is essentially giving away washers and dryers to households which have no running water or
electricity and recording this as economic growth. Given that the official numbers may bear little similarity to the actual
economy, AEI looks at the central bank’s actual activities to infer what is actually going on. In June, growth in the money
supply measure known as M2 surged to 28.5% year-over-year—up sharply from a 15% rate at the beginning of the year. New
loans by banks rose 34.5% year-over-year in June from a 30.6% growth rate in May. Reading this, one could guess that
Chinese policymakers are experiencing difficulties in prompting total spending to match their ambitious growth targets and are
increasing money supply to stimulate demand. But somewhat counter productively, the resulting flood of money has flowed
into stocks, property markets, commodity stockpiles, and consumer durables (with the help of special incentives for purchases
of durables). The rest of the world’s economy has been working (or not working) furiously to cut inventories and costs since
last year, which should make the recovery accelerate faster as inventories are rebuilt alongside growing demand. Any recovery
in China could be muted, as increased demand just chews through existing inventory and as liquidity induced bubbles pop.
Last week, John Mauldin highlighted in his weekly newsletter that 1 million tonnes of copper cathode inventory could be
sitting in China which is not being counted in the global copper inventory levels. So could China be the one holding back the
global economic growth as the world emerges from these doldrums while China is still chewing through inventory? |
