An Important Distinction: GDP Growth vs. Economic Growth

Real GDP Growth in China 3% or Less

It is actually much worse than China expert Michael Pettis explains below:

GDP growth is not the same as economic growth. Consider two factories that cost the same to build and operate. If the first factory produces useful goods, and the second produces unwanted ones that pile up as inventory, only the first boosts the underlying economy. Both factories, however, will increase GDP in exactly the same way.

Most economies, however, have two mechanisms that force GDP data to conform to underlying economic performance. First, hard budget constraints, which set spending limits, drive companies that systematically waste investment out of business before they can substantially distort the economy.

Second, there is a market-pricing factor in GDP accounting that when bad debts caused by wasted investment are written down, the value-added component of GDP and the overall level of reported growth are reduced.

In China, however, neither mechanism works. Bad debt is not written down and the government is not subject to hard budget constraints. It is the government sector that is mainly responsible for the investment misallocation that characterises so much recent Chinese growth.

The implications are obvious, even if most economists have been surprisingly reluctant to acknowledge them. Anyone who believes there has been a significant amount of wasted investment in China must accept that reported GDP growth overstates the real increase in wealth by the failure to recognise the associated bad debt. Were it correctly written down, by some estimates GDP growth would fall below 3 per cent.
__ Michael Pettis quoted in Mishtalk

Since 2008, virtually all of China’s GDP growth has been built on bad debt, overproduction, and shoddy construction and misallocation. Perhaps all those empty buildings would represent economic value — had they been built to last and hold their value. Sadly, this is not the case.

China’s Buildings and Public Works are “Poorly Made”

In order to meet government growth quotas, construction projects are thrown up quickly, with minimal quality checks or oversight. Poor steel, poor concrete, and shoddy construction methods combine to create buildings, bridges, tunnels, and towers that are made to fail prematurely.

Quality Fade” is not uniquely Chinese, but it is much too common across the spectrum of products that are made in China.

China’s Economy is Not All It’s Made Out to Be

China’s top Party leadership owns a significant portion of the rotten enterprises that should have been allowed to die off many years ago. But due to the connection between Party leaders and zombie enterprises, China’s unsound debt bubble has been allowed to inflate without checks or bounds. As long as the rest of the world pretends that there is nothing wrong, China’s economic problems will be contained on the backs of its workers. Elites will milk the system as long as they can, hoping that they can get out when the time comes.

There is no significant “market discipline” within the Chinese system, so that when the props start failing there is likely to be little warning ahead of time. The good news for China is that it has become the supplier of low priced goods to the entire world, when quality does not matter so much. From weapons systems to consumer electronics to pet food, low prices will continue to draw buyers and investors/exporters to China for many years.

The bad news is that other emerging nations can now offer better deals in terms of labour costs and shipping costs than the ageing dragon, without most or all of the piracy, technology theft, and under the table dealings. And China’s working aged population is beginning to shrink.

The number of working-age people in China fell by 4.9 million last year, according to data from the National Bureau of Statistics.

The record annual drop brings the number of people aged between 16 and 60 to 911 million, and illustrates a trend in which fewer young workers are entering China’s workforce, while the number of retirees grows. __


China boosters tend to swallow official economic numbers without chewing them first. This may make them gullible, but it makes any readers who take them seriously into chumps. Take care to look beneath the facade.

More: The Cracks in China’s Economy

China seems to be working alongside Russia to create the North Korean nuclear monster. Russia provides the rockets, China supplies the guidance systems. The axis of evil lives on.

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4 Responses to An Important Distinction: GDP Growth vs. Economic Growth

  1. Rudolf Huber says:

    Russia shrinking, China shrinking. The Asian century amounts to some paltry years it seems.

    • alfin2101 says:

      China is not actually shrinking. In some areas it appears to be excelling. But China is certainly due for a series of shakeups and shocking adjustments.

  2. John Q Public says:

    Big part of our problem is that, no matter how bad America is, everywhere else is worse.

    • alfin2101 says:

      Yes, they say the same thing about capitalism, constitutional republics, and representative democracies. The human world is a tumultuous place because humans themselves are not very bright, not very wise, and not very creative in productive ways. If more people understood the basic underlying problem, there would not be so much nonsense in the media, on-campus, or on the net.

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