In its quarterly economic outlook this week, the IMF observed that these days, as in 2015-16, concerns about the health of China’s economy can trigger abrupt, wide-reaching sell-offs in financial and commodity markets.
How true. In fact an energy market analyst was moved to comment: “What we’re seeing in the market, call it for the last month or so, is that every day is almost a referendum on what China growth is going to look like in 2019.” He was talking about oil, but he might just as easily have been talking about other markets.
It is generally agreed that the health of China’s economy is pretty important to the world these days, and none more than Australia, which makes the fact that it’s almost entirely fictitious either worrying or reassuring, and I’m really not sure which.
If a country’s economic statistics are made up, as China’s are, then as long as everyone is in on the joke and agrees to takes them seriously, well — there’s a sort of perverse security in that … until there’s not, of course.
This week China’s GDP was reported to be 6.4 per cent for the fourth quarter of 2018 and 6.6 per cent for the year. The target in the Communist Party government’s latest five-year plan is, as it happens, 6.5 per cent, smack in the middle of those two numbers. Neat! More importantly, everyone took it as true: China is growing at target. Relax.
The release came just three weeks after the end of the quarter, which was a bit slower than usual, but faster than any other country. Australia’s ABS checks, rechecks and checks again for two months before letting the GDP out of its sight; US statisticians take about a month, and then revise, revise and revise some more.
China’s number-crunchers are the fastest in the world for two reasons: first, the statistics are routinely falsified, and second, GDP in China is not a measure of output, as it is everywhere else, it’s an input. The reported figure is, within a very small tolerance, either at or above Beijing’s annual growth target, and that is known well ahead of time. No need to waste time measuring and counting.
As Michael Pettis, professor of finance at Peking University’s Guanghua School of Management, wrote two weeks ago: “Reported GDP in China is no longer a measure of economic growth, but rather a measure of political intention.” He goes on: “When analysts discuss what reported GDP indicates about the health of the Chinese economy, such thinking involves a very basic mistake in systems theory — a systems input can only offer insights about the goals of the operators, never about the performance of the system itself.”
The government’s target is met through the use of debt. Local governments are expected to generate enough economic activity to reach the decreed number, and can borrow as much money as they need to do it.
So at the end of December, as the trade war with the US was weighing on exports, the State Council in Beijing announced that local governments would be allowed to start borrowing earlier in 2019 — from January, instead of March as usual.
The 2019 quota for local government bond issuance is 1.39 trillion yuan, or $280 billion — that is new debt that may be raised in 2019 to prop up the economy. That adds to existing debt of more than $40 trillion, or 255 per cent of GDP, greater even than Australia’s household debt to GDP ratio, which is saying something.
The Xi government had started 2018 with the best intentions of controlling China’s exploding debt and started to do so, but in the second half, as activity waned, that idea was abandoned.
President Xi’s priority quietly shifted from reforming the economy and further opening it up, to imposing greater Communist Party control, mainly his own, which basically means propping the economy up, not starting a credit squeeze. It has also involved the creation of a huge mass surveillance operation, including the amazing (and horrifying) “citizen score”, which is built from vast amounts of personal data using artificial intelligence, and determines what benefits each person gets. Also, there are video cameras everywhere using facial recognition, so everyone’s movements are constantly monitored. Not to mention the vast “re-education” camps for Muslims.
And now they are even locking up citizens of other countries for views expressed outside China, without even telling the person’s home country (Australian citizen Yang Hengjun).
Is continued economic growth of any sort, let alone 6+ per cent, compatible with a colossal pile of debt and a suffocating police state? I guess we’re about to find out.
The trade war with the US is shorthand for something much bigger than that. It has been clear since October that America is understandably trying to rein in China’s largely illegal efforts to dominate global technology, which was reinforced this week by a joint report from the US Chamber of Commerce and the American Chamber of Commerce in China detailing how China is implementing its “Made in China 2025” to achieve tech dominance.
Markets were shaken on Thursday by a report in the Financial Times that the US had turned down an offer by China to hold preparatory talks for another round of negotiations, later denied by White House economic adviser Larry Kudlow. Expect more of that sort of thing, but the real problem with China’s economy is not the rivalry with the US, but its own failings: mendacity, tyranny and, perhaps above all, demography.
China’s labour force is now declining and the dependency ratio has gone from 10 per cent to 16 per cent since 2001. What’s more, the birthrate has continued to decline after the abolition of the one-child policy in 2015, which is perhaps the greatest negative of all.
Alan Kohler is Editor in Chief of InvestSMART