Even though its absolutely true that the Chinese economy is growing, it's also this articles contention that a significant portion of that growth and GNP number is not a result of true economic activity. by James Luko
(centrist)
Saturday, December 19, 2009
Of course not. Currently, in real dollars at today's exchange rate average ($/RMB) China's Gross National Product is estimated at between 4.125 4.350 Trillion USD. That's a pretty big economy, it would equal it to Japan or even surpass it making it the second largest economy in the world. It however still pales behind America's 13.5-14 Trillion dollar economy (inclusive of the current recession).
Is the Chinese GNP number accurate ? Of course it cannot not be very accurate since the numbers depend on data submitted by domestic sources- mainly, SOE's, State Owned Enterprises.
SOE's still represent approximately 2/3'rds of the Chinese economy, which makes the overall GNP number highly dependent on the accuracy of data submitted by SOE's. SOE's over the past 20 years have had a great incentive to "cook the books" by submitting "fuzzy math" accounting. By western accounting principles a great number of Chinese SOE's are technically bankrupt. (This is mainly because special subsidies, labor and other costs are NOT included in calculating net profit, assets, etc) .
In the last 20 years SOE's have dramatically "increased" their reported assets, profits and positive cash flow for TWO main reasons. First, bad and incompetent management have inflated the numbers to cover enormous losses, mass corruption, bad investments and plain poor performance. Second, inflated numbers give SOE's increasing leverage to borrow billions of dollars from fellow State Owned banks, and with these billions SOE managers invest in real estate and stocks and increased capacity of their SOE. In all this, these SOE managers have become the modern rich elite class of China. Therefore, the incentive and requirement to create ever increasing "artificial" and false numbers of growing profits, assets and cash flow has compounded the factor of false, inflated and artificial economic growth. These are the numbers for which the State authorities calculate GNP.
If it's that simple, why aren't Western companies doing the same thing ? The simple fact that the majority of economic activity remains with State Owned business in China versus private business in western countries and thus why Western business and economic statistics are far more accurate.
Many SOE's operate in a government nexus between companies and banks, and therefore, state banks along with massive corruption, rarely audits true assets, price values, of what SOE's claim in order to borrow massive billions of dollars, thus, the false, inflated and artificial numbers are never revealed. Most banks lending to SOE's accept company submitted numbers, state an audit was done but it was not, or the government audit merely copies the accounting data that the company submits. It's a viscous circle between the SOE's and banks, as was in Japan during the 1980's, that has sustained this ever increasing spiral of false numbers. One can imagine the compounding of false economic data over the past 29 years in the Chinese economy that even leading bankers in China admit that because of lack of transparency and true accounting, they have little idea of the dynamics of the Chinese economy nor its true size. In the West, obviously a private bank is going to conduct an "independent" audit of company claims before it lends money, (this is regarding lending- not investments in derivatives) and therefore, the accounting data of profits, cash flow and assets are much more accurate. This is the first major reason why the Chinese GNP number is vastly inflated and certainly an artificial number.
There is a second reason why, especially in the past 5 years a great percentage of China's GNP growth is "artificial." This reason is "over capacity." The "over capacity" issue in China will be the leading and over-riding economic issue in China's economy in 2010. Few people outside China realize that much of the growth in high profile and leading manufacturing sectors in China is "simply not real." Why ? Companies capacity and production is occurring at a mad pace, yet sales are hardly matching production and inventory stock. Meaning, state banks have poured cash into leading Chinese industries (mainly SOE's) who have opened and created cool new factories, hired millions of people but just like the old Soviet Union, they are producing for no one. Yes they have some sales, but they are producing MUCH more than they are actually selling. So, when these SOE's are compiling their "fussy math" accounting records, they are able to show banks and the world that capacity is increasing, hiring continues at a torrid pace, and value assets of inventory thus the value of the company is "soaring. " All this computes into the "false" GNP number expressed by the government of China. Over capacity is the giant part of the iceberg currently "underwater" which will eventually rear its ugly head and cause a major economic dislocation in the Chinese economy. This is especially more true due to falling export demand thus a major method of mopping up excess capacity and inventory is not present nor will be for the next several years. Over capacity is now reported at record and potentially catastrophic levels: (current estimated utilization rates ) Steel 72%, Aluminum 67%, Cement 78%, Chemicals 80%, Refining 85%, renewable energy products 54%. [1] This massive overcapacity and over production, however, is reported in government stats as great positive signs of the continued high growth in the Chinese economy. This massive over production is also reflected in a positive perspective in the context of increased raw materials orders, production rates, hiring- increased employment, new shiny factories, etc. creating another "Enron" effect- that all indicators point to torrid GNP growth, smiling workers, new factory floors opening up, increased valued assets of companies (along with valued- but unsold inventory), but in fact, much of it is merely massive over production from gigantic over capacity.
In the past five years this has grossly misstated the "true" size of the Chinese economy. An internal report by China's central bank has revealed enormous overcapacity in: steel, cement, flat glass, coal, chemicals, refining, pharmaceuticals, poly silicon and alternative energy products. These industries, one must realize, is a major part of China's economy and would obviously have great impact on the bottom line in China's GNP numbers. When one considers the effect of compounding these artificial numbers of the past five years in light of reported 10% yearly growth- one can easily realize just how "false" China's GNP number really is.
The President of the European Chamber of Commerce in China, Joerg Wuttke, reported last month that over capacity has led due an artificially low bankruptcy rate (which would otherwise shake out over capacity- shrink the economy reflecting the true state of affairs in China's economy), little to no implementation of environmental laws (which in effect means that our more expensive production- but environmentally sound production in the West is in effect, subsidizing "dirty" Chinese production), wide-spread ignoring of Chinese labor laws by the government- (meaning Chinese companies can produce cheaply- but illegally) undervalued currency- ( in order to try to "dump" the huge inventories the RMB must remain artificially low).
China's GNP is growing ? Is it "really" growing or are the "numbers and data" growing ? Bank of China and CITIC bank in China reports in October 2009 [2] that "profits" are dropping because of a shortfall in "real" demand of borrowing. Despite a fall in fuel prices, government incentives and 160 million dollars dolled out as subsidies by China's Civil Aviation Administration, China Southern Airlines, Air China and China Eastern will (according to Western accounting audits- but not government audits) all loose money in 2009 and 2010. [3] China Telecom first half profits down by 29%, and the European Chamber of Commerce in China reports that in 2009 Chinese government restrictions on foreign investments, new barriers to market entry, subsidies and new local protectionist policies have "frozen" out effective competition in China's economy. [4]
When the two factors of SOE false data reporting and over capacity (production) is taken into account, could it be that China's GNP is perhaps, really 3-3.5 Trillion dollars and not 4.1-4.3 Trillion ?
The evidence and logic is clear that the numbers are highly inflated and distorted.
Note: This article is not about China bashing, naysaying, but rather, a dose of reality about the statistical assumptions and presumed facts about an economy that is NOT transparent. Without transparency assuming numbers offered by the Chinese government as "accurate" and true reflections would be an exercise in wishful thinking. When you speak to many Western managers here in China, they "all" talk about how the Chinese market is "really" not all that big as being touted in Western and Asian media. The super dynamics of the Chinese economic media profile is highlighted by a few conspicuous products like Champagne sales, luxury auto sales, etc. But the hard data shows that enormous sectors of China's manufacturing is actually stock piling enormous amounts of unsold inventory- yet because they are State Owned Enterprises- and because of corruption and lack of transparency- a significant portion of China's growth and assumed GNP level is as false as the global warming hoax and Enron. This article does NOT deny there is "real" economic growth in China, but rather the rate and size is being significantly exaggerated.
1. Roland Berger Strategy Consultants 2009 Estimate Report
2. EuroBiz Journal October 2009
3. Ibid
4. European Chamber of Commerce in China 2009 End of Year Report
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Indeed. It's hard enough to have any degree of transparency in our own economy let alone an economy that refuses to show you any evidence of their performance. Is their economy growing? I'd say yes due to the imperical evidence. How much is it growing and how much of that growth is being fueled by fraud and "fuzzy math"? Who knows, but it's likely to be a lot.
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