How Fast Is China Growing?
Mike (Mish) Shedlock | Mar 12, 2015 05:56AM ET
Analyst estimates of Chinese growth keep getting lower and lower. Yet, those declining estimates have all been from a lofty level: From 10% to 9%, to 8% to 7.5%.
China's growth target for 2015 is 7.0%.
Many question those growth estimates. I certainly do. Chinese growth is not consistent with energy demand, raw materials, or personal consumption. Worse yet, growth does not factor in pollution or malinvestments in vacant housing, vacant malls, vacant airports, etc.
Malinvestments, pollution, and State-Owned-Entreprise (SOE) boondoggles (fraud is actually a better word) should all subtract from current GDP. Instead, fraud, pollution, and malinvestments have been buried and will remain buried until it's impossible to hide them.
I assumed China was growing slowly. After all, 7% is one hell of a lie. However, I now wonder if China is growing at all.
What caused my double take was a fascinating presentation by Anne Stevenson-Yang, Co-Founder of JCap and author of Is China Already in a Hard Landing?
The video is very lengthy, but there are a number of speakers. Yang was the first speaker. Her presentation was about 28 minutes, less if you skip the first four introductory minutes or so. The rest is time well spent.
h3 Is China turning into Japan?/h3
That’s the new topic.
Debt matters - $30 Trillion – up $9 trillion since 2008
Debt is 200-300% of GDP counting Shadow Banks.
If the average interest rate is 7% (banks 6% shadow banks 10%), economy would need to grow 21% in real terms to service debt.
Since that cannot happen, banks cannot make loans without injections from PBOC. A fundamental problem is 100% of new credit goes to rollovers. Zombie economy effect – no credit demand – low demand. Steel down, electricity down, cement demand down Growth sub subzero this quarter. No way economy is growing.
Massive overcapacity in petrochemicals, construction machinery, steel, cement, aluminum, SOEs. It will take years of growth to fill capacity. Aluminum official said privately debt Is $1 trillion, profit 20 billion. Local governments force mills to open because smelters cannot make payments, banks have NPLs. Smelters are capital, not labor intensive.
Get The News You Want
Policy is not about jobs but about keeping money flowing.
Consumer sector tracking close to 0% growth as well – average days of clothing inventory is 174 days, electronics 123 days.
Consumer companies on China exchange Decline in gross revenue is 2% for the year, 6% third quarter.
Urbanization
Local government officials hold nearby land with an incentive to get people to move in.
Local people want schools hospitals.
No real economic benefit.
Orange and lemon groves turn to useless, vacant housing.
Property 20% of GDP and tracking negative (sales and pricing).
Overcapacity is absolutely obscene – 70 million units in the pipeline. 50 million vacant units. At height of US bubble, US built 1.2 million homes.
QE3 – No one has a good grip on who owns the debt.
Allowing debts to go under without even understanding who understand it can create a chain of consequences that any government would be terrified to identify.
Amount of capital required to keep rolling things over has reached a dangerous level.
Capital flight
Net reduction of $91 billion in US$ reserves last year
Bang or whimper?
Long deflationary bust
Massive daily injections to keep system running.
[Mish note: I question the above slide and corresponding video comment. I do not think she means 1.5 trillion daily]
What’s Next?
China has over $3 trillion in reserves, but many of those reserves not so liquid.
h3 Is China’s 1929 Moment Coming?/h3
Yang made her presentation on February 24.
Since then, many others are questioning China's growth. For example, on March 5th the Washington Post asks Why Beijing’s Troubles Could Get a Lot Worse .
Barron’s: Investors seem far more concerned about Europe’s sinking into economic despond than slowing growth in China. Are they whistling past the graveyard?h3 Is China Growing?/h3Stevenson-Yang: I think so. China, for all its talk about economic reform, is in big trouble. The old model of relying on export growth and heavy investment to power the economy isn’t working anymore.... The country is now submerged by the tsunami of bad debt that begets further unhealthy credit growth to service this debt. The recent lowering of benchmark deposit rates by the People’s Bank of China won’t accomplish much because it won’t offer more income to households.
Barron’s: How bad can the situation be when the Chinese economy grew by 7.3% in the latest quarter?
Stevenson-Yang: People are crazy if they believe any government statistics, which, of course, are largely fabricated. In China, the Heisenberg uncertainty principle of physics holds sway, whereby the mere observation of economic numbers changes their behavior. For a time we started to look at numbers like electric-power production and freight traffic to get a line on actual economic growth because no one believed the gross- domestic-product figures. It didn’t take long for Beijing to figure this out and start doctoring those numbers, too.
I put much stock in estimates by various economists, including some at the Conference Board, that actual Chinese GDP is probably a third lower than is officially reported. And as for the recent International Monetary Fund report calling China the world’s biggest economy on a purchasing-power-parity basis, how silly was that? China is a cheap place to live if one is willing to eat rice, cabbage, and pork, but it’s expensive as all get out once you factor in the cost of decent housing, a car, and health care.
Barron’s: Conventional wisdom holds that China has plenty of levers it can pull to stave off severe economic contraction and any debt crisis. Do you agree?
Stevenson-Yang: Not really. Take, for example, the $3.9 trillion foreign-currency reserves that we discussed. Many people regard it as a giant piggy bank that can be tapped at will to rectify any financial problem. But the reserve is only good for defending the yuan and is a lot less liquid than many people realize. And as we pointed out, capital flight could dramatically diminish the size of the reserve.Interestingly, liquidity seems to be a growing problem in China. Chinese corporations have taken on $1.5 trillion in foreign debt in the past year or so, where previously they had none. A lot of it is short term. If defaults start to cascade through the economy, it will be more difficult for China to hide its debt problems now that foreign investors are involved. It’s here that a credit crisis could start.
China may be growing, but even 4% is not only a hard landing but a huge problem.
Stretching to reach hugely unrealistic growth targets is precisely what has created zombie SOEs with debt that cannot be serviced, cities where no one lives, massive amounts of pollution, and a cornucopia of other debt problems.
h3Global Recession at Hand/h3
The spillover effects of a China slowdown on Australia, Canada, and Brazil are now widely recognized. Spillover effects of a China slowdown on the US and Europe have yet to manifest in a huge way. But they will.
The US dollar is soaring and without a doubt that will hurt US exports. If China lowers the yuan to compete with Japan, an all out currency war loom at a time the Fed is presumably itching to hike.
For a discussion on a potential currency crisis and a dollar shortage, please see Is There a US Shortage? Will it Sink the Global Economy? Again?
The US economy is nowhere near as strong as it seems. With factory sales down 6 month, I am sticking with my US recession call made in January.
I reiterated my US recession call on March 10th in Wholesale Trade: Sales Down, Inventories Up; GDP Estimate Revised Lower Again; Sticking With Recession Call.
Finally, Europe is a complete basket case. Few understand that debt that cannot be paid back. Fewer still recognize that Greece and Spain are not really to blame.
For a very lengthy discussion of who is to blame for the crisis in Europe, what needs to be done (but won't), please see From ZIRP to NIRP: Virtues of Germany vs. the Vices of Greece; What About "Speece" and Gold?
Add a US recession, European recession, and a China recession (or huge slowdown) together and there is only one conclusion: a global recession is at hand. Hardly anyone sees it coming.
/h2
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