Some analysts who are usually astute and show a good understanding of
economics seem to put on blinders before looking at China. It’s as if, when
considering China’s prospects, they forget everything they know about
economics and refuse to see beyond the superficial. A recent example is Doug
Casey’s article titled “Chung
Kuo“.
Here’s an excerpt from the Casey article:
“I can give you a dozen credible scenarios describing what might
happen in China over the next couple of decades. But the trend that seems
certain to continue is the rapid rate of wealth increase there. I don’t
credit official figures with any great accuracy, but if we take them as being
approximately right, then the U.S. economy is growing at 2%, and China’s at
about 7% — but with a base of about four times the population. What this
means is that the largest economy on the planet will soon no longer be
America’s — but China’s.”
There are two big problems with the above paragraph. First, after saying
that he doesn’t credit official figures with any great accuracy he takes
these figures as being approximately right. The reality, however, is that
China’s reported growth figures are completed fabricated. It’s not that
China’s government reports growth of 7.0% when the actual rate of growth is
6.5%; it’s that China’s government reports growth in the 6.5%-7.5% range
every year regardless of what’s happening. If the economy were shrinking
rapidly the government would still report growth in the 6.5%-7.5% range.
Based on other measures of economic activity there have almost certainly been
12-month periods over the past 10 years when China’s economy shrank in real
terms, but during these periods China’s government still reported growth of
around 7%.
The second problem is that the monetary size of an economy is irrelevant
to the people living in it. What matters is per-capita wealth, not aggregate
wealth and certainly not aggregate spending (which is what GDP attempts to
measure). For example, it’s quite possible that in size terms Nigeria’s
economy will overtake Switzerland’s economy within the next few years, but so
what? Nobody in their right mind is saying that if this happens then the
average Swiss will be worse off than the average Nigerian, because it
obviously must be taken into account that there are 175M people in Nigeria
and only 8M in Switzerland.
The Casey article then goes on to list some of the things that China has
going for it, but most of these things were just as applicable 100 years ago
as they are today. Therefore, they aren’t critical ingredients for strong,
broad-based economic progress.
Surprisingly, given that Doug Casey’s big-picture analysis is usually on
the mark, the Casey article fails to address any of the most important
issues. There’s no mention, for example, that China has a command economy
with only token gestures towards free markets.
The true colours of China’s economic commanders were shown in 2015
following the bursting of the stock market bubble that they had purposefully
created. I’m referring to how they became increasingly draconian in their
efforts to stop the price decline. When words of support didn’t work, they
made short-selling illegal and began to aggressively buy stocks. When that
didn’t work, they forbade corporations and investment funds from selling at
all and made it clear that bearish public comments about the stock market
would not be tolerated. And when the market still didn’t cooperate, they
started apprehending or ‘disappearing’ people suspected of placing bearish
bets.
Related to the “command economy” issue is the fact that China has always
had an emperor. This means that there is no history of freedom or a culture
of individual-rights to fall back on. Furthermore, Xi Jinping, the current
emperor (who doesn’t call himself an emperor), has shown admiration for Mao
Tse Tung, the most brutal emperor (who also didn’t call himself an emperor)
in China’s history.
There’s also no mention in the Casey article that over the past 10 years
China has experienced the greatest mal-investment in centuries. You would
have to go back to the pyramids of ancient Egypt or the building of the
Terracotta Army by China’s first emperor more than 2000 years ago to find
comparable examples of resource wastage on such a grand scale.
All the ghost cities, spectacular-but-mostly-vacant shopping malls,
barely-used airports and bridges to nowhere have boosted the Keynesian measures
of growth — such as GDP — that don’t distinguish between productive and
unproductive spending. Consequently, even if the GDP growth figures reported
by China’s government bore some resemblance to reality (they don’t), the
reported growth wouldn’t be a reason to be optimistic because so much of it
is associated with wasteful spending. Moreover, the bulk of the spending is
debt-funded by State-controlled banks that would make Deutsche Bank look
financially ‘rock solid’ if given a proper accounting treatment.
Next, there’s the legacy of the “one-child policy” to consider. Thanks to
decades of the national birth rate being restricted by the giant boot of
government, China is now facing a major demographic problem. Specifically,
for at least the next couple of decades the number of prime-age workers is
going to shrink relative to the elderly.
Finally, it is worth mentioning China’s mind-boggling wealth disparity. A
few hundred million people are doing OK and a few million have become
extremely wealthy while at least a billion people are living in abject
poverty.
As to why some people who produce well-reasoned analysis of what’s
happening in the Western world seem incapable of applying the same principles
and logic when analysing China, I can only guess. My guess is that they are
too focused on trying to show the US in a negative light to see what’s going
on in China. It is, however, possible to be concerned about the direction in
which the US is heading without being bullish on China.
