Unanimously clairvoyant, 11 brokerage houses and investment banks last year predicted that China’s G.D.P. would grow by 8 percent in 2002. And on Dec. 30, in Beijing, China’s National Bureau of Statistics disclosed that the Chinese G.D.P. grew by 8 percent. The implausibility of this predictive success brought to mind General Electric and its corps of obedient securities analysts during the stock-market bubble. However, not even the “Six Sigma” G.E. accounting department was able to report on a given year’s results before that year was over. The Chinese statistical bureau produced the 2002 number on Day 364.
Following is a revisionist look at China, the nation on which the West projects its hopes and fears. The hope is that 1.2 billion Chinese customers will one day stop sitting on their wallets and spend a little money. The fear is that Chinese businesses, both foreign-owned and domestic, will produce so much, and at such low cost, as to drag the world into deflation.
What hopeful and fearful observers all uncritically accept is the picture of the boom-time Chinese economy portrayed by official statistics. “Good times make bad numbers,” says the Wall Street adage, describing a trait of human nature, not an exclusively capitalist foible. The quality of American corporate reporting did not improve during the bubble years. Nor has the quality of Chinese government reporting been uplifted by the pressure to uphold the statistical appearance of a functional, balanced and dynamic economy, growing at a fast enough rate to keep up with the expansion of the Chinese labor force. On the statistical evidence, China is-and long has been-the Tyco of emerging markets.
In a New Year’s editorial celebrating the glory of the U.S. economy, The Wall Street Journal approvingly referred to “the Chinese growth machine.” What manner of machine is this? There is a Chinese export machine, which last year sold more merchandise to the U.S. than Japan did, according to the U.S. Census Bureau. (Through October, China’s exports to the U.S. totaled $101 billion; Japan’s, $99.3 billion.) The export drivers are mainly foreign, i.e., the businesses officially designated “overseas-invested ventures.” In 2002, according to the Chinese government, overseas investment in China reached $52.7 billion, up 12.5 percent from 2001. “China’s huge market potential is being unleashed, its infrastructure and policy environment have greatly improved and its relative advantage in labor and resources is gaining world attention, some analysts said,” according to the absolutely impartial New China News Agency.
The U.S. census data are what they are. But the domestic Chinese economy is very far from being what the official Chinese data represent it to be. The People’s Republic is a socialist economy dependent on subsidized credit, government command and foreign capital. Interest rates in China are fixed by the state, credit is dispensed by the state and investment is planned by the state. “The best part of the Chinese economy is the part that gets the least credit,” says an authority on the Chinese credit system, who asks not to be named, “and the worst part of the Chinese economy is the part that gets all of the subsidized credit.”
The problem is well understood, our anonymous source continues, and the government is trying to address it. But progress is necessarily slow and uncertain. In a strange and disastrous merger of cultural liabilities, Chinese bankers seem to combine the credit judgment of Japanese bankers with that of Texas S&L operators.
Standard & Poor’s puts China’s nonperforming loans at between 30 percent and 50 percent of total loans, or between $406 billion and $677 billion. “These projected problem loan levels are, respectively, more than four and seven times the paid-in capital of the Chinese banking sector … ,” the agency adds. “There are only two things to know about the banking system in China,” writes Gordon Chang, Hong Kong lawyer and author of The Coming Collapse of China (Random House, 2001). “First, the major state banks, the so-called Big Four, are insolvent. Second, the effort to bail them out is not working. Everything else is simply detail.” The shambles of the banking system is reason enough to doubt that the nonconvertible Chinese renminbi will soon enter the mainstream world of tradable currencies.
In October, a Wall Street Journal reporter lyrically described China as “the world’s factory floor.” No, it is not, prosaically argues Goldman Sachs’ economics department (in “The Great Myth: China Is Going to Take Over the World,” June 26, 2002): “China’s impact on the G3 economies has been minimal,” the firm points out, “largely because China trade still barely registers on the chart for the G3. Trade with China accounted for slightly less than 1 percent of G3 GDP in 1990; by 2001 the share had risen to 1.5 percent of GDP, a net increase of only 0.5 percent of GDP. This reflects actual trade data; if we adjust for the ‘production chaining’ effect, there is almost no change in China’s underlying trade impact on the G3 economies over the last decade.”
This is not to say that Chinese competition discommodes no one. An announcement last fall of a Chinese-made microprocessor (“Dragon Chip No. 1”) and accompanying Linux operating system justifiably sent a chill through the joint empire of Intel and Microsoft. However, we think it says more about Western perception than Chinese fact that so much fear and loathing and admiration are directed at the People’s Republic.
“China’s rise as a manufacturing base is going to have the same kind of impact on the world that the industrialization of the U.S. had, perhaps even bigger,” a Morgan Stanley economist, Andy Xie, was quoted as saying in The Wall Street Journal a few months ago. It is going to have to be a very fancy rise. As it is, the domestic Chinese economy resembles nothing so much as a giant, corrupt, unprofitable, New Deal era public-works and leaf-raking project.
The Times on Jan. 13 cited chapter and verse in a story on the southwestern Chinese city of Chongqing, now at the tender mercies of the government’s engineering and planning apparatus. “The Communist Party has pledged to support private companies and allow the market to flourish,” the paper said. “Financially, though, the authorities are monopolizing the country’s private savings for a building boom that dwarfs the New Deal and the Marshall Plan.”
Is it curious that an economy putatively expanding at breakneck speed should require immense public-works projects? Not at all, according to the aforementioned Mr. Xie of the previously cited Morgan Stanley: “The government is sucking up savings and investing in the future. The financial returns on these kinds of investments are low. But the payoff for the economy is high.”
But “these kinds of investments” are the economic staples of communism, the political system that the Chinese Communist Party has supposedly abandoned. The irony of fast Chinese export growth, notes Joe Studwell in his 2002 book, The China Dream , is that the Communist Party first destroyed what it subsequently allowed to flourish. “By the 1970s,” writes Studwell, “Mao Zedong’s government had reduced China’s foreign trade to a fraction of its pre-1949 levels. Even with the fastest sustained growth in the world-an average of 15 percent a year over the past two decades-China’s exports and imports as a share of world trade only surpassed their 1928 peak in 1993. After a six-decade hiatus, this performance was celebrated as a miracle.”
Mr. Chang, the noted bear, quotes some advice proffered to a Western visitor to China in the 1970’s by China’s future paramount leader, Deng Xiaoping. “You are a scholar, a professor,” said Deng, fixing his visitor with a meaningful look. “You should never believe Chinese statistics.” Mr. Chang has documented the systematic inflation of Chinese economic data. So, too, has Thomas G. Rawski, a professor at the University of Pittsburgh who writes, in a 2002 paper entitled “Measuring China’s Recent GDP Growth: Where Do We Stand?”: “My review of available information has convinced me that official growth claims for 1998 and 1999 are totally divorced from reality, and that actual growth amounted to a maximum of about 2 percent (and possibly much less) annually for these years, with negative growth a real possibility. Beginning in 2000, performance has improved substantially. The economy is surely growing, but, in my view, at something like half of the officially claimed rate. While official figures show real GDP growth of one-third between 1997 and 2001, my own belief is that actual growth amounted to no more than about 12 percent, and may have been considerably smaller.”
In evidence, Mr. Rawski cites cases of the apparent contradiction of bullish macro data by bearish micro data. Thus, for instance, the economy supposedly expanded by 5.4 percent in 1998, but measured Chinese air travel rose by only 3.4 percent. (So gross was the book-cooking in 1998 that Chinese statisticians described a “wind of falsification and embellishment.”) Urban household incomes allegedly grew by 8.5 percent in 2001, but surveys found that more than half of Beijing residents and 80 percent of Shanghai residents expected no growth in incomes in 2002. And if, as frequently reported, the Chinese consumer’s propensity to spend is low and falling, “what accounts for the consistently rapid growth of retail sales depicted in official reports?”
Then there are the unguarded, recurrent expressions of unofficial pessimism by government officials. “The performance of China’s economy has been very lousy recently,” Xu Hongyuan, director of the economic-forecast division under the National Bureau of Statistics’ State Information Center, was quoted as saying in the Jan. 29–Feb. 4, 2002, edition of China Daily Business Weekly . In 2001, the Chinese G.D.P. grew by 7.3 percent (which, to be sure, was 0.7 percent lower than it would be the next year; perhaps the director, a perfectionist, was just refusing to settle). An Aug. 1, 2002, Bloomberg dispatch from Beijing captured what we regard as the essential Chinese statistical non sequitur: “The consumer price index hasn’t risen since October 2001, and record household savings suggest people are reluctant to spend. Still, the central bank said it expects retail sales to rise 9 percent this year.”
On Jan. 4, the Financial Times disclosed that the number of Chinese investment accounts was far smaller than previously claimed. According to the FT: “Instead of 68.7 million investors, a figure still propagated by the authorities and repeated by analysts and the local and foreign media alike, the real number is probably less than 10 million.” And oddly enough in a country putatively enjoying the greatest boom on earth, Chinese stocks have been falling for 18 months.
At the turn of the last century-another time of China obsession-John Hay, U.S. Secretary of State, spoke portentously: “Whoever understands that mighty Empire socially, politically, economically, religiously, has a key to world-politics for the next five centuries.” One century down, and still no dice.
© 2003, Grant’s Interest Rate Observer .