How Far Can You Trust China’s GDP Numbers?
The GDP framework cannot tell us whether final goods and services that were produced during a particular period of time are a reflection of real wealth expansion, or a reflection of capital consumption. For instance, if a government embarks on the building of a pyramid, which adds absolutely nothing to the well-being of individuals, the GDP framework will regard this as economic growth. In reality, however, the building of the pyramid will divert real funding from wealth-generating activities, thereby stifling the production of wealth.
China has certainly been building pyramids of phantom wealth and bubbles of overproduction. Massive monetary expansion is being fed into an economic system of rickety state-owned enterprises, shadow banking loans, and a pyramid investment system that is becoming more and more reminiscent of the sub-prime loan collapse of 2007-2008.
“We’re starting to see layers of liabilities built upon the same underlying assets, much like we did with subprime asset-backed securities, collateralized debt obligations, and CDOs-squared in the U.S.,” Charlene Chu, a partner at Autonomous who rose to prominence in her former role at Fitch Ratings by warning of the risks of bad debt in China, said in an interview on May 17.
If defaults by large industries continue at the current rate in China, pyramids will crumble.
China’s GDP numbers have been ginned up by bubbles within bubbles arising from massive injections of misallocated credit into a corrupt, top-heavy, excessively state-connected economic system. Instead of running a massive trade surplus, it appears to be running a trade deficit. More
China’s wealthy are using every trick they can conjure to convert bubble wealth into more solid forms of wealth outside the country. Buying luxury real estate from Hong Kong to the French Riviera is an obvious means of moving capital overseas, but there are far more imaginative techniques:
To take one example, of trade between Mainland China and Hong Kong, there are significant discrepancies between the value reported to Chinese customs and Hong Kong customs. Hong Kong reported imports from China worth $255 million USD but China reported exports to Hong Kong of $335 million USD. The 31% difference in customs prices, or $79 million, is too large to be unintentional and acts as a capital inflow into China. Conversely, China reports $12.8 billion USD of imports from Hong Kong but Hong Kong only reports $2.6 billion USD of exports to China. The 385% difference is far in excess of the low mid to single digit invoicing discrepancies that are standard in global trade. Consequently, the $10.1 billion USD in over invoiced Chinese “imports” acts as a capital outflow from China.
One of the factors that affect a nation’s currency valuation is trade balance. Another is public debt. Yet another is economic performance. And then there is political stability. By all of those measures — when looking past skewed government statistics — China’s economic wealth is overstated at this time.
China has many other problems, including poisoned soil-water-air-food-beverage, a shrinking workforce, excessively shoddy construction and other industrial production by state owned enterprises, a corrupt government that refuses to unshackle the Chinese people from their many sets of chains, and growing instability on all levels — masked by an increasingly belligerent military and paramilitary force. But a collapse of pyramids and bubbles could easily be the detonator for an expanding, deadly shockwave originating in Beijing.
The risk of military confrontation — to take the minds of the people off their own problems — grows daily. Xi may have learned some bad lessons from his frenemy to the northwest in Muscovy, in that regard.
Hope for the best. Prepare for the worst. Try not to be taken in by phantom and overvalued economies such as one sees in corrupt and oppressive regimes. Venezuela should be a warning for those who had not been paying attention until recently. Global stability is a temporary phenomenon which the leaders of Europe, Russia, China, and much of the Anglosphere are all attempting to destroy. They will eventually succeed, if the legacy of Obama is any indication.
Meanwhile in Muscovy: