In case you are wondering about Chinese growth…

by on February 18, 2013 at 6:24 am in Current Affairs, Economics | Permalink

I still do not believe that the Chinese “recovery” is for real:

Chinese credit issuance surged to a record high in January on the back of a boom in shadow banking, stoking concerns that the economy could overheat.

Total new financing in January reached Rmb2.5tn ($400bn) – up more than 50 per cent from December and more than double the figure a year ago – eclipsing even the start of 2009 when China unleashed stimulus spending to battle the global financial crisis.

…The big increase in credit issuance stems from last year when China slouched to 7.8 per cent growth, its weakest in more than a decade. To revive the economy, the government stepped up the pace of infrastructure investment and gave a green light to banks to provide more funding, including through off-balance-sheet channels.

This succeeded in fuelling a recovery in the final quarter of 2012 and the momentum of that upturn has continued through into the start of this year.

But I would gladly be proven wrong.  The FT article is here, and I will admit, at the very least, to needing to revise my views on how often the fires can be restoked.  I had been expecting 3 to 5 percent “real growth” for China in 2012.  By the way, also from the FT, you will find a more optimistic take on Chinese matters here.

Now there are two new estimates, each revising downward actual Chinese gdp.  Here is one report:

Wiemer argues that “household services and manufacturing upkeep” component of the official CPI index is a better measure of services inflation.

And, given that adjustment, from Stephen Green:

…our [gdp] guesstimates for 2011 and 2012 are 7.2% and 5.5%, respectively, compared with the official prints of 9.3% and 7.3%.

From Toshiya Tsugami, here are further worrying signs.  About half of measured growth is coming from fixed investment, and yet bank data suggest these investments are a) not close to self-financing, and b) the figures are “grossly inflated” in the first place.  By the way, these fixed investments rose 20% from 2011 to 2012, not exactly the rebalancing which everyone is looking for.

I would again stress that we do not yet know what is going on, but it is a mistake to assume that China is in the clear.  If you put together the Green and Tsugami modifications into one revision, what kind of growth would we be measuring?

Frederic Mari February 18, 2013 at 7:43 am

On this subject, I am very much in agreement with you (I am sure you feel a lot better now that you know… :) ).

Basically, fixed investment is ‘consumption’ for the first year or till the project/bridge/airport is realised. It’s only after, when people expect/need income from their ‘investment’ than the truth becomes glaringly apparent.

I have never gotten the point of how China thought that adding production capacity in a world with an output gap was a good idea beyond the first spending round. However, like you, I do hope to be proven wrong. Still, I think it’d have been safer for the Chinese elites to risk re-balancing towards consumption than to keep defending the status-quo… We shall see, as the blind man says…

Brian February 18, 2013 at 10:20 pm

Doesn’t a rapidly deteriorating apartment building, rail-line, or school have a consumption aspect and less of an investment aspect? Perhaps China’s economy has been more balanced than the conventional belief.

collin February 18, 2013 at 9:37 am

How about China is entering the Roaring Twenties (or 1924ish) versus going bust in 1929. The government and largest companies do work close enough to smooth the bad debt for awhile and with growing wages the rebalancing is slowly (glacier speed occurring). Due to its size and nobody nearly big enough to replace the manufacturing cheap labor of China, the growth of wages will increase consumption while the over-investment continues. (Also with such mobility the population grows into the over-investment not unlike the US railroad experience.)

In the next 6 – 8 years, that does not mean the bust occurs and it will be big but they are ready for some bubble growth.

Frederick Harrison February 18, 2013 at 11:15 am

Despite the global economic situation, China keeps growing. China ranks the 25th among large countries least hit by the economic crisis, as stated in the Orlando Bisegna index, which measure the intensity of the economic crisis in various countries.

Noah Smith February 18, 2013 at 12:08 pm

I kind of believe this overall story. However, I’d like to see Togami offer some sources or numbers showing that return on FIA has been low. His entire argument rests on that one assertion, but he simply states it without backing it up (Japanese op-eds have much to learn in this regard).

mulp February 18, 2013 at 6:48 pm

“from fixed investment, and yet bank data suggest these investments are a) not close to self-financing,”

What defines “self-financing”?

Were all the road and dam and water and sewer and even national park cabins and trails “self-financing”? Is the cabin in the park still used 75 years later not self financing given it was built with labor that would otherwise have produced nothing? What of the water and sewer mains still in use today, and 25 years past replacing based on the rate they break and leak and cause sink holes?

Of course, we were told the Iraq war would pay for itself, so is that “self-financing”?

No one claimed WWII would be “self-financing”, and the US was not attacked and wasn’t likely to have actually been at risk, so was that wasteful spending or a good investment?

Were the Egyptian pyramids, the Parthenon, etc., “self-financing”? Those public works defined those nation states in concrete ways in their own times, not just thousands of years later.

And in the 80s tract housing was built in Texas only to be bulldozed, just as tract housing was built in the 00s in Arizona that might end up being bulldozed. When did those become NOT “self-financing”?

mpowell February 19, 2013 at 12:15 pm


I would again stress that we do not yet know what is going on, but it is a mistake to assume that China is in the clear.

This sentence is bewildering to me. What could it possibly mean? Do we expect China to average 10% real growth forever? Certainly not. Even if the last few years have been at the advertised rate of 7-10%, we should expect this to slow eventually. I am not aware of any economic model or prediction by a serious forecaster that can do anything more than explain that China could probably realize greater than average real growth until their per capita GDP is on par with the developed world. But nobody has any idea what the catchup curve actually looks like! For either a managed economy like China’s or any other kind. If China slows to 5% real growth are they not in the clear? This is a perfectly reasonable, healthy growth pattern for a developing economy. What is so dangerous about that result that it warrants the tone of this post? Are the Chinese people going to revolt over it? What is so special about 5% growth compared to 10% growth?

It is one thing to say that you think Chinese growth is slowing. There is plenty of evidence to suggest that it is, and all reason suggests that it should eventually. But making ominous noises about this outcome, or claiming they are not in ‘recover’ is quite odd. Is their economy growing? Was it ever not growing? Why are we using terms like recovery, then?

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