When Good News is Bad
The news out of China is surprisingly upbeat. Production numbers are up, domestic consumption is up, the housing and stock markets are still rising and car purchases are up too. If you go to any shopping mall in Shenzhen you’d really be forced to ask yourself “what recession?!” It looks that good.Even though I’ve doubted before that they can keep it up, I’m hopeful that China can keep injecting cash into their own economy. But there is context and other numbers that make me worry that this can't continue. The real telling numbers are these:1. Loans are up despite the govt tightening. This is a clue as to where the money for domestic consumption is coming from. If FDI is down, orders for export are down but loans and domestic spending are both up, where do you think that money is coming from?2. And electric consumption is down. Obviously the money isn't coming from orders.3. Exports from China are still down year on, Germany and Japan too—meaning world demand is not yet back regardless of what Chinese shoppers are doing. So either the government found the magic pill to get Chinese consumers to actually consume or there are going to be a lot of NLP's in a couple of years--maybe they're the same thing! Want to know what the US housing/stock market crash would look like if it was in China? Just wait. You will.4. Oct 1 is the 60th anniversary of the CCP. Do you honestly think that they'll allow a bad economy to ruin this celebration? Not a chance.5. What happens in China stays in China. The RMB is not convertible and can’t be invested outside of the country—cash comes into China but never leaves. The fact that 1.5 billion Chinese consumers don’t have the impact that 300 million recession-hit Americans do is magnified by limits on the export of the RMB. So while foreign companies can make money, no Chinese companies or individuals are going to be investing abroad. (“Chinese companies” that invest abroad are NOT Chinese but from Hong Kong or are from other tax advantageous areas or have special state permission, i.e. support state interests.) By the way, one reason the RMB isn't portable is because if you had all the cash suddenly leave China what do you think would happen to the domestic savings accounts (that the government forces banks to loan to SME's)? What would happen to the stock market? What would happen to the housing market? Since people can't put their money anywhere else, these markets are unnaturally high. Release of the RMB to international markets would be like a pin in a huge balloon--explosion, destruction and then inflation.6. Almost everything you see here is scripted for someone else’s agenda. 7. Call it whatever you'd like, PC Accounting, Accounting with Chinese Characteristics, none of what you read is true.Most businessmen (and many Chinese) conveniently think that business is business and politics is something that is far away in the north. That may be true “back home” and that’s certainly true when it comes to law enforcement here. But the government is involved is a SIGNIFICANTLY larger % of the economy in China than probably just about anywhere you’re coming from. This is true even for “privately” owned factories. Remember, despite the fact that China has more people than any other country on the planet (and combined middle and upper classes the size of the total US population) consumers are a much smaller percentage of the economy than any other developed economy by a wide margin. So any increase in numbers of the Chinese economy (e.g. “China will reach 8% growth in 2009”) is completely a product of government involvement in the economy at best and government manipulation of numbers at worst. (Thanks to John T. for the article link) From the article:
China has predicated its very claim of being the healthiest large economy in the world on faulty statistics. The government insists that even though China's all-important export sector has been devastated -- contracting about 25 percent in the past year -- a massive uptick in domestic consumption has kept factories producing and growth churning along. A close examination of retail sales and GDP growth, however, tells a different story. China's domestic retail sales have risen about 15 percent year on year, but that does not really translate into Chinese consumers purchasing 15 percent more televisions and T-shirts. The country tabulates sales when a factory ships units to a retailer, meaning China includes unused or warehoused inventory in its consumption data. There is ample evidence that state-owned enterprises buy goods from one another, simply shifting products back and forth, and that those transactions count as retail sales in national statistics.China's retail statistics seem implausible for other reasons, too. They would imply an increase in salaries among Chinese people, allowing them to purchase that extra 15 percent. To be sure, the Statistics Bureau reported salaries had increased 12.9 percent in the first half of 2009. But Chinese netizens complained such numbers were hard to believe -- as did the bureau's chief.A look at GDP growth also raises serious questions. China's economy grew at an annualized 6.1 percent rate in the first quarter, and 7.9 percent in the second. Yet electricity usage, a key indicator in industrial growth and a harder metric to manipulate, declined 2.2 percent in the first six months of the year. How could an economy largely dependent on manufacturing grow while its industrial sector shrank?It couldn't; the numbers don't add up. China announced a $600 billion stimulus package (equal to about 14 percent of GDP) last fall. At that point, local governments started counting the dedicated stimulus funds in GDP statistics -- before finding projects to use the funds, and therefore far before the trillions of yuan started trickling into the economy. Local governments keen to raise their growth and production numbers said they spent stimulus money while still deciding on what to spend it, one economist explained. Thus, China's provincial GDP tabulations add up to far more than the countrywide estimate.
Finally, the tire (or tyre) clash that is heating up—who loses out more in a trade war at this point? I think that it’s the US. We need both the cheap products made in China to keep inflation low and the buying power of the Chinese govt to keep investing in our debt. China, will increasingly be trying to decouple their economy from the US and encourage both domestic consumption and exports to other markets and this will fuel that plan. Oh, yea, and this is another broken campaign promise by BO.I may be the only guy whose business is China and who is publicly hoping that my analysis of China’s current situation is wrong.