China’s Global Economic Leadership is a Fable

China is aging, wages are rising to uncompetitive levels, capital is fleeing, and the CCP is propping up a bubble economy that is losing ground.

China’s economic importance [is] falling — not rising slowly, nor staying stable, but falling.

…. For decades, China has reported much faster growth in gross domestic product. By 2015, the difference in the two countries’ GDP measured only $7 trillion. But GDP shows activity, not prosperity. For example, if a building is built and torn down over and over, every senseless iteration adds to GDP.

If this criticism seems like a stretch, it’s less of one in the PRC, as evidenced by what would be a property bubble anywhere else. More generally, it is telling that China can report GDP growth above 6.5 percent, yet independent observers see stagnant private wealth, and even the government admits debt has soared for six years. China has a very active economy, but not a very productive one. __ China Losing Ground

Shoddy Construction Boosts China GDP Source

Shoddy Construction Boosts China GDP
Source


In China, land is owned by the government. The government only makes money when land is leased for new construction and from the “up-front” full tax payments from real estate sales. So the more often the land can be recycled in a build – demolish – build cycle of endless reconstruction, the more money the government can make from land leases and property taxes. So buildings are only designed and constructed to last between about two decades.

Seen in this light, huge Chinese “ghost cities” make perfect sense, as long as the massive credit stimulus behind this perennial construction boom can be kept alive.

Everyone seems to profit from these “disposable cities,” he writes. Contractors and developers save money by cutting corners on building materials, labor and craftsmanship. The Chinese government buys back properties to resell to developers. The steady demolition and construction helps to inflate employment levels. __ http://citiscope.org/citisignals/2015/chinas-disposable-cities-are-not-built-last

To be clear: property taxes are paid in full when purchasers buy real estate properties. This boon to the government is another incentive for making sure that the property does not last very long before being demolished — so that another property can take its place to keep the eternal cycle of taxation going.

China’s two steadfast pillars of growth, exports and domestic investment clearly show cracks in their veneers. China’s exports for October slumped 7.3 percent from the previous earlier, despite the yuan’s depreciation during the past year. This is reflected in the stock of foreign exchange reserves, which peaked over a year ago at $4 trillion but have now fallen to $3.1 trillion.

Imports have also been falling—clear evidence that domestic demand has slowed more than the authorities or headline numbers acknowledge. Despite stringent capital controls, capital flight has clearly accelerated as affluent Chinese have lost confidence in the domestic economy.

Fixed-asset investment is still running at 45 percent of GDP, leading to significant excess capacity in industries ranging from steel to solar panels. Earlier objectives to lay off six million workers in state-owned enterprises early in President Xi’s term have not materialized, and state-owned banks continue directing credit to prop them up.

So, is the Chinese economy entering a period of stagnation?

Because the credit spigots cannot gush indefinitely and much of the mounting debt will likely go bad, it appears reasonably likely. And the window to solve these problems is quickly closing. __ http://dailysignal.com/2016/12/02/is-the-chinese-economy-hitting-stagnation/

China's Buildings Too Often "Demolish Themselves" Source

China’s Buildings Too Often “Demolish Themselves”
Source

More on China’s shoddy construction

Last year, China Economic Review reported on a controversial study that said poor building quality and China’s short-sighted land-lease system would lead developers in major urban areas to neglect reinvestment in city centers. The study, published by an international team of scholars, said the conditions would push investment to the outskirts of cities, leading to urban sprawl. More alarming, it could also cause city centers to decay into slums.

The following bears repeating:

Fixed-asset investment is still running at 45 percent of GDP, leading to significant excess capacity in industries ranging from steel to solar panels. Earlier objectives to lay off six million workers in state-owned enterprises early in President Xi’s term have not materialized, and state-owned banks continue directing credit to prop them up.

Source
Official state growth statistics place Chinese economic growth near 7% per year. More reliable sources put the figure closer to 4% per year. But if you take a very close look at “productive growth” as opposed to “manic growth” and misallocation, you will see that productive growth in China is less than 2% — and may even be less than 0%.

There are data, grounded in real-world calculations, that show China’s economic importance falling — not rising slowly, nor staying stable, but falling. __ RealClearWorld

There is a cost to be paid for devoting so much credit to propping up growth numbers by building shoddy ghost cities, corrupt state owned enterprises, and other fixed-asset investments of questionable value. If China’s leaders misjudge events, they could have a large-scale insurrection on their hands when the bubble bursts.

Why US and other foreign companies are fleeing China

Not long after multinationals showed up in China, they were made to hand over much of their technology to native competitors (almost all of which are directly or indirectly owned by the Chinese government) … Proprietary technology is the most valuable asset owned by many multinationals. So China truly offered a lose-lose choice for these companies — either they could miss out on the Chinese market in the short term, or give away technologies that would allow Chinese competitors to challenge them all over the world in the medium term. Of course, given China’s high rate of industrial espionage, the penalty for operating in China was even higher than official government policy would suggest.

More:

China might do better by taking a more cooperative tone with the US president-elect. Foreign investment and voluntary technology transfer by foreign corporations are the things that fueled China’s recent rise. Both of those things are slipping away, and the running dog neo-imperialism of China’s leaders is only making it worse.

Pretence vs reality

http://www.theepochtimes.com/n3/2194802-why-china-cannot-lead-globalization-in-a-post-trump-world/

https://www.bloomberg.com/view/articles/2016-12-06/why-china-should-heed-lessons-of-pearl-harbor

Advertisements
This entry was posted in China, Economics, Empire and tagged . Bookmark the permalink.