The powers that be have made it plain they will spend whatever it takes to reach the magic 8% annual GDP growth rate in 2009. But how does China actually measure its GDP, and why should the world care?
The Financial Times raises the question, and a lucid and well-written article by John Makin at the American Enterprise Institute provides some answers. China’s definition of GDP growth and America’s definition are starkly different, which has thrown into question the efficacy of China’s approach to stimulating its economy and measuring the impact of the of its US$560 billion package. America measures its growth (or decrease) in wealth (Gross Domestic Product) by guaging expenditure growth: defined as the sum of consumption, investment, government spending, and net exports. China does just the opposite: the Chinese Central government – still stuck in the soviet-style mindset of production-as-reality at all costs – measures production activity without taking into account inventory stocks or actual expenditures. The form of measurement is one of the reasons for China’s bloated State-owned enterprises and for some of the economic disasters in its very recent history.
So, if a sneaker company in Guangdong produces a hundred pairs of sneakers with an attached value of RMB 6,700 (about US$1,000 in 2009 currency), then the Chinese government tracks the value of the shipment as part of its GDP statistics; whereas the United States government measures the expenditure on the shoes plus the value of any remaining inventory. For China, this way of measuring growth in its economy reflects some level of reality so long as buyers are buying all that is produced. However, as was the case in the economic downturn of 2008-9, buyers in other countries dried up. So, the Chinese government encouraged export-driven factories to begin selling to Chinese consumers inside the country. However, the spending power as well as the appetite of Chinese consumers, though growing between 10% and 15% per annum, was far from the easy-spending Americans and the more frugal Europeans.
Makin writes in his article, “China: Bogus Boom”:
There are anecdotal reports of Chinese households buying washing machines that were aggressively shipped and counted as retail sales during the first half of the year. However, many of the households that purchased washing machines, or were virtually given such machines, have found them unusable because their homes lack either the running water or electricity (or both) necessary to make use of a modern appliance. Such problems arise when ambitious planners count shipments as retail sales while end-use demand may be absent. In such cases, the “sales” are made to happen by virtually giving away the products that have already been produced and counted as GDP growth.
So, to give the perception that China’s economy was actually on its way to meeting its 8% growth rate, it told the four largest banks in the country – all of which are State-owned – to open up lending specifically to State-owned Enterprises and to local governments for infrastructure projects. It didn’t matter whether the companies or governments produced anything with the money, or even how they spent it if they did, since the release of funds in and of itself would register as production in the Chinese economic view. In other words, the only thing that mattered was that the transaction itself would be registered as growth in GDP and – the powers that be hoped – encourage Chinese consumers to spend because the economy was outperforming other economies in the world.
The flood of money has already resulted in dubious projects appearing on the schedules of local governments. The Washington Post wrote:
A $3 billion metro rail system linking the southern manufacturing cities of Guangzhou, Dongguan and Shenzhen, for instance, has been criticized as a waste of money because there are already four railway lines linking the cities and the trains often run empty. Ditto a $4.5 billion highway connecting the Sichuan province cities of Chengdu, Zigong and Luzhou, because there are already highways from Chengdu to Zigong and from Zigong to Luzhou.
A bridge running from just outside Shanghai to a textile manufacturing center on the other side of a bay was also resurrected to create construction jobs. For years, its designers had been unable to get the $2 billion they needed to build it because its route would mostly duplicate that of another massive bridge that was already under construction.
That changed in November when at least six of the biggest employers at the other end of the bridge, in Shaoxing, went out of business. Even though there is less need because of the closures, blueprints for the second bridge were dusted off and, almost overnight, workers broke ground. The project is expected to employ about 250,000 people and indirectly provide jobs for 300,000 more.
Which, of course, is the most important goal of any economic initiative in China: to provide opportunities for its citizens to be able to make at least a modicum of living, if not actually be able to become wealthy one day.
Monies the State-owned enterprises and local governments have not yet slated for projects are flowing into the real estate and stock market bubbles the government had worked to deflate as late as last summer (2008). As Andy Xie, an independent economist, wrote for Caijing Magazine recently:
“The tough economy and easy credit conditions encouraged many companies to try profiting from asset appreciation. They borrowed money and put it into the stock market. And since China’s stock market has risen 70 percent since last November, many businesses feel vindicated for focusing on the asset market. This speculation spread to Hong Kong. Mainland money may have been behind a recent rise in the Hang Seng Index to 19,000 from 15,000, as well as Hong Kong luxury property sales. One way or another, it seems the money source was China’s lending binge.
Borrowing money for asset market speculation is not restricted to private companies. State-owned enterprises (SOEs) appear to be lending money to private companies at high interest rates, i.e. loan sharking, using money borrowed at low rates from state-owned banks. Of course, we can’t estimate the magnitude of such SOE lending. But it has replaced high interest rate financing in the gray economy.”
Even with the prospect of the asset bubbles bursting, I believe China will continue to bolster liberal lending policies to at least give the appearance to the rest of the world that China is actually creating wealth in its economy. What it is actually doing, though, is just pushing money around. The stock market will for the forseeable future remain the purview of the SOEs, shielded by inadequate transparency and restructuring of listings. Further, China is long way off from providing investors with additional, internationalized outlets for investment beyond buying domestic property. And then, the long-awaited return of the American buyer as saviour of China’s export sector will be a chimera, never to return in its original form and enthusiasm. The government will find tamping down the bubbles will be even more difficult to achieve than before. Inflation will have to be tamed by fiat, just as had been the case with electricity and oil in early 2008. However, the Yuan just might come down to a more sensible valuation, because China’s fundamentals will seem so out of whack with the economic statistics it presents the world.
Oh, that Crazy 8.
Several Westerners I’ve talked with here in China seem to be sketching a trend in the way people perceive and act on work. Instead of just working at a “job” or taking another “job” or looking to get promoted in their “job” they are either moving from a part-time “job” or no “job” at all to a Portfolio of Work. The portfolio contains several activities that are projects and/or actual businesses. For instance, one American I know is leading the start-up of a new factory that will produce goods for the American market. He has American partners – and Chinese money. But he has still formed another contract manufacturing business here in China with other Western friends.
Thousands protesting are big numbers, even by China’s reckoning. Especially if the protests occur in two separate regions in as many days, are violent, and have essentially the same reason: the rich getting richer in China by unashamedly gaming the system.
