2000-2013《中国经济崩溃論》

21/09/2013起整理｜
*What’s Happening to China’s GDP Statistics?

By Thomas G. Rawski*
Revised September 12, 2001
Prepared for China Economic Review symposium on Chinese statistics, to appear in issue 
12.4, December 2001

During a May 2001 conversation with several Chinese economists in Beijing, I expressed doubt that China’s recent GDP statistics reflect actual economic performance.  Without missing a beat, a Chinese colleague said, “Nobody believes recent GDP statistics.” According to the New York Times, “many economists say the country’s real economic growth rate is, at most, half of that reported” [Smith 2001]. 

What’s going on? I believe that, beginning with 1998, standard GDP data contain exaggerations that extend far beyond the technical difficulties addressed in recent studies

(e.g. Maddison 1998; Meng and Wang 2000; Ren 1997).  This comment focuses on three matters: quantitative inconsistencies, qualitative information from Chinese commentaries, and suggestions about the possible magnitude of overstatement.

Quantitative Inconsistencies

Official figures for recent GDP growth appear in the top row of Table 1.  The yearbook figures imply that real GDP grew by 24.7 percent between 1997 and 2000. During the same three years, energy consumption dropped by 12.8 percent. The implied reduction of 30 percent in unit energy consumption over three years seems implausible, despite the rapid growth of computer manufacture and other activities with low unit energy consumption. Rapid growth of energy efficiency is not a hallmark of China’s economy: in 1997/98, for example, the efficiency of energy conversion in producing thermal electricity, coke, and refined oil products all declined, and the “total efficiency of energy conversion” was no better than the average for 1983/84.¹

[Table 1 About Here]

International comparisons highlight the implausibility of recent Chinese growth claims. Table 2 presents capsule summaries of several Asian economies during comparably short time periods going back to the 1950s. China’s recent official growth story is an obvious misfit: in every other instance, including China’s own experience ten years earlier, substantial GDP growth coincided with increased energy use, higher employment, and rising consumer prices.

[Table 2 About Here]

Returning to recent Chinese data, the clash between output and energy trends is only one of many unlikely elements. The figures for 1997/98 bristle with inconsistencies. Could farm output increase in all but one province despite floods that rank among China's top ten natural disasters of the 20^th century?²  Could industrial production rise 10.75 percent even though only 14 of 94 major products achieved double-digit growth and 53 suffered declining physical output?³ Could investment spending jump 13.9% even though steel consumption and cement output rose by less than 5%?⁴ Skeptical Chinese analysts point to many such puzzles (e.g. [Meng 1999]).⁵

Subsequent figures seem equally dubious. Data on consumption, which Chinese accounts identify as “a major driving force in the rapid development of the economy,” are especially problematic.⁶ Table 3 compares national data on retail sales growth with survey figures showing changes in per capita outlays by urban and rural households. With one exception, ⁷ national figures for retail sales grow more rapidly than per capita expenditure figures shown in household budgets. The difference is far too large to attribute to population growth, which is approximately one percent per year.

[Table 3 About Here]

A further difficulty is that, particularly in rural areas, retail sales rise more rapidly than household income, implying an increase in the average propensity to consume – i.e. the share of consumption spending in household income. However a recent studies finds a declining trend in the average propensity to consume among both urban and rural households through 1998 [[Zhang 2000], [Tao 2000]]; subsequent reports indicating that “moderate income growth has intensified people’s tendency to save money” [Bing 2001] point to a continuing decline in the ratio of consumption spending to income – the exact opposite of what the retail sales data imply.

Information from Chinese Commentaries.

Beginning in 1998, Chinese analysts complain that the statistics system has become enmeshed in a “wind of falsification and embellishment” [jiabao fukuafeng]. Extensive commentary in Chinese sources, including many specific and detailed accounts,⁸ leaves no room to doubt that intentional falsification of economic performance indicators is commonplace throughout the business community and at every level of government. The result is "universal falsification of statistics, as a ‘statistical bubble’ works its way up through the system, and provides mistaken reportage to the decision-making levels" [[Meng 1999], p.78].  Premier Zhu Rongji complained in March 2000 that “falsification and exaggeration are rampant” [Nation 2000, p. 5].  

Starting in 1998, the National Bureau of Statistics [NBS] has rejected provincial growth data on economic growth, which it dismisses as “cooked local figures” [Xu 1999].  Despite recent efforts to create statistical networks that bypass local and provincial governments, the Bureau lacks the capacity to collect data outside normal information channels, particularly since survey research remains subject to interference from lower-level officials (e.g. [Hu, Chen, and Zhou 2000], p. 24).

Chinese policy discussions often ignore the official growth scenario.  A July 2001 account cites Wu Jinglian’s view that “China has reversed its downward momentum in economic growth, which started in 1997” [Factors 2001].  An August 2001 summary of views on fiscal policy notes that deficit spending “was introduced in 1998 to overcome insufficient domestic demand and dwindling exports,” and then observes that because “the economy has been revived, some economists say that the positive policy should be weakened” [Jia 2001], p. 1].  But official projections show that growth in the “revived” economy of 1999/2001 is slower than in 1997 and no greater than in the endangered economy of 1998. These (and other) texts suggest that prominent Chinese economists base their analysis on private maps of recent trends that differ substantially from the official picture sketched in Table 1.

In addition, many Chinese accounts directly contradict official figures. For example: “Per capita income in urban and rural areas continued to fall in the first quarter of this year” [Wang 1999].  “In October [1999], 66 per cent of [apparently urban] consumers said their household incomes had either remained unchanged or had decreased during the previous 12 months” [Bu 1999].  “In recent years, rural incomes have gone down year by year [zhunian xiajiang]” [Wang 2000].

Toward An Alternate View of Recent GDP Growth

Since abandoning provincial growth reports, the National Bureau of Statistics has offered no public explanation of how its central office derives the figures that serve as official estimates of China’s national growth. Pressure to affirm official growth targets overwhelms local and provincial statistical bureaus, Chinese economic analysts, and even international bankers and market researchers whose firms pursue business ties with Chinese government agencies. Can we believe that the central offices of the National Bureau of Statistics remain untouched by these circumstances?

For readers who share this author’s discomfort with the official data, analysis of recent economic trends must begin by exploring alternatives to the official figures in Table 1. The size and diversity of China’s economy pose formidable obstacles to any such effort.⁹  Nonetheless, China’s civil aviation industry offers a starting point for reassessing recent GDP growth.

Airline travel appeals to a high-income clientele. Since rising inequality is a prominent feature of China’s economy in the 1990s [e.g. [Xu and Zou 2000]], income growth among the airlines’ prosperous clientele surely exceeded the norm, probably by a large margin. A fierce price war slashed ticket prices during 1998.¹⁰ Airlines routinely offered discounts of 30-40 percent to travelers on domestic routes.  With customers’ incomes rising and ticket prices plunging, passenger traffic should have grown well ahead of disposable income and aggregate consumption, the largest components of aggregate income and expenditure. Yet the data for 1997/98 show that passenger miles rose by only 2.2 percent on domestic routes and 3.4 percent overall.¹¹

In the absence of major shifts in the structure of GDP, the elementary economics of demand and consumption points to 2.2 percent as a generous upper bound for overall real growth during 1997/98. Declining energy use, output reductions in many branches of industry, mass layoffs, widespread excess capacity, inventory accumulations, and the impact of major floods make this a far more plausible measure of 1997/98 GDP growth than the official figure of 7.8 percent. And 2.2 percent is an upper bound. The actual result could have been far lower, perhaps even negative.

The (entirely plausible) qualitative picture presented in Chinese reports indicates that GDP growth declined slightly in 1998/99 and improved thereafter.  The continuation of excess supply, downward price pressure, near-zero employment creation, widespread excess capacity, inventory build-up, and large-scale accumulation of idle bank deposits indicate that real growth remains well below the 7 percent level needed to absorb new urban labor force entrants [Ge 1999].

These considerations underlie the proposed alternate figures for GDP growth shown in Table 1. These figures represent little more than guesses about China’s recent GDP performance. They are not firmly grounded in empirical data. But unlike the official figures, the alternate series does seem consistent with Chinese policy discussions and with official data on changes in employment, prices, and energy consumption.

Official performance measures for recent years imply that China’s economy has entered an unprecedented interlude that combines high-speed growth with declining energy use, falling prices, minimal employment growth, widespread excess supply, rampant overcapacity, low expectations, and large-scale pump-priming.  Even though recent growth claims defy economic logic and clash with a broad array of credible information from Chinese sources, economists both within and outside China have continued the long-standing practice of routinely adopting official figures,.  This “business as usual” approach is a recipe for bad policy and flawed research.

The alternative is to hypothesize that the National Bureau of Statistics has run afoul of the same political pressures that have caused local authorities to become “obsessed with. . . GDP growth rates – the leading criteria for evaluating cadre performance” ([Gilley 2001], p. 18), to conclude that official data showing 7-8 percent real GDP growth for recent years reflect official objectives rather than economic outcomes, and to continue the search for alternate figures that can provide a realistic appraisal of China’s recent economic performance.

Table 1 Chinese GDP and Related Data, official and Alternate Figures, 1998-2001 (Percentage change)

Cumulative Growth 1998 1999 2000 2001 1998-2001 Real GDP Official 7.8 7.1 8.0 7.9 34.5

 Alternate -2.0 / +2.0 -2.5 / +2.0 2.0 / 3.0 3.0 / 4.0 0.4 / 11.4*

Energy Use -6.4 -7.8 1.1 1.1 -5.5

Urban Formal Employment 2.3 1.6 1.2 1.2 0.8

Consumer Price Index -0.8 -1.4 0.4 -0.5 -2.3

Notes: Figures for 2001 cover only the first two quarters. The cumulative growth calculations assume no change for the second half of 2001. Alternate figures are author's guesses - see text.

*Endpoints of cumulative growth range based on low and high annual growth figures.

Sources: data for 1997-2000 are from [Yearbook 2000], p. 21 (official real GDP), p. 118

(urban employment) and from [Abstract 2001], pp. 130 (energy) and 84 (prices). Figures for 2000/01 are from Monthly Indicators vol. 16 (July 2001), pp. 14, 15, 32, and 70.  The energy data for 2000/01 refer to production rather than consumption.

Table 2.
Episodes of Growth in Asian Economies, 1957-2001
(cumulative percentage change)

Cumulative	Japan	Taiwan	Korea	China	China
Change in	1957/61	1967/71	1977/81	1987/91	1997/2001
Real GDP: official	52.8	49.7	21.6	31.8	34.5
alternate					0.4 / 11.4
Energy consumption	40.1	85.2	33.6	19.8	-5.5
Employment	4.6	17.0	9.4	23.2	0.8
Consumer prices	10.6	20.6	111.7	46.6	-2.3

Sources: for Japan, [Ohkawa and Shinohara 1979], pp. 282, 389, 393 and    www.stat.gov.jp/english/1431.htm (Table 9-20); for Taiwan, www.stat.gov.tw   and [Taiwan 1983], pp. 103 (employment) and 209 (power consumption); for Korea, www.nso.go.kr/eng; Chinese data for 1987/91 are from Yearbook 2000, pp. 55, 118, 239, and 289; data for 1997/2001 are from Table 1.

Table 3. Growth of Retail Sales and Per Capita Income and Expenditure, 1997-2001(percentage change, nominal amounts)

Cumulative Growth 1998 1999 2000 2001 1997-2001* Aggregate retail sales 6.8 6.8 9.7 10.3 38.0

Urban data Retail sales 7.1 7.1 10.6 11.6 41.6 Per capita*

 income 5.2 7.9 7.3 6.7 30.0 living expense 3.4 6.5 8.2 4.6 24.6

Rural data Retail sales: County 5.2 5.7 8.3 9.3 31.6 Below county 7.0 6.6 8.3 7.4 32.7

 Per capita*
 Net income 3.4 2.2 1.9 -7.5 -0.4
 Cash outlay

            Series A 0.8 -0.9 -8.5 -6.8 -14.8 Series B -1.5 -1.5 -0.7 -6.8 -10.2

 Cash outlay for consumption Series A 0.2 1.4 12.2 6.6 21.5 Series B -1.7 -0.8 5.9 6.6 10.1

 * indicates data from household surveys

 Notes: Figures for 2001 cover only the first one or two quarters. Calculated
 values for cumulative growth assume no change for the remainder of 2001.

  Sources: Data for retail sales are from Monthly Indicators vol. 16 (July 2001), p. 34.

     Urban income data for 1997/2000 are from [Abstract 2001], p. 94 and measure total income. The figures for 2000/01 are from Monthly Indicators vol. 16         (July 2001), p. 80; they cover 2 quarters of 2001 and refer to disposable income.

     Rural income data for 1997/2000 are from [Abstract 2001], p. 100; they measure net income. The figures for 2000/01 are from Monthly Indicators vol. 16         (July 2001), p. 88; they measure cash income and cover only the first quarter of 2001.

      Urban outlays for living expenses from [Abstract 2001], p. 93 and (for the first half of 2001) from Monthly Indicators vol. 16 (July 2001), p. 81.      Rural cash outlay and cash outlay for consumption: Series A from Monthly          Indicators, vol. 16 (July 2001), pp. 88-89.  Series B from [Abstract 2001],

 p. 98 (for 1997/2000); the figure for 2000/01 is taken from Series A.

REFERENCES:

Abstract. 2001. Zhongguo tongji zhaiyao 2001 [China Statistical Abstract 2001]. Beijing.

Bing, Lan. 2001. "Deposits Up as Income Growth Slows." China Daily, 13 February 2001, 1.

Bu, Ran. 1999. "Increased Renting Expected." China Daily Business Weekly, 6 December 1999, 6.

Factors. 2001. "Factors Favour Economy in Latter 6 Months." China Daily, 30 July 2001,

4.

Ge, Yanfeng. 1999. "Fangfan he huajie shehui fengxian - 1999-nian Zhongguo jiuye zhengce xuanzi" [Prevent and Resolve Social Risk - China's Employment Policy Choices for 1999]. Beijing: Development Research Center.

Gilley, Bruce. 2001. "Breaking Barriers." Far Eastern Economic Review, 12 July 2001, 14-19.

Growth. 2000. "GDP Growth Expected to Reach 8 Per Cent." China Daily, 24 November 2000, 1.

Hu, Shaozhong, Xiaowei Chen, and Hongliang Zhou. 2000. "On Rural Statistics." Zhongguo tongji [China Statistics] (6):24-26.

Indicators, 2001. 2001. China Monthly Economic Indicators, Vol. 16, July. Vol. 16. Beijing: National Bureau of Statistics.

Jia, Hepeng. 2001. "Rethink on Fiscal Policy." China Daily Business Weekly, 7-13 August 2001, 1, 24.

Maddison, Angus. 1998. Chinese Economic Performance in the Long Run. Paris: OECD.

Meng, Lian. 1999. "Analysis of Economic Conditions and Policies During the Past Several Years." Gaige [ Reform] (3):73-82.

Meng, Lian, and Xiaolu Wang. 2000. "An Estimate of the Reliability of Statistical Data on China's Economic Growth." Jingji yanjiu [Economic Research] (10):3-13.

Nation. 2000. "Nation Moves Boldly Forward." China Daily.:5.

Ohkawa, Kazushi, and Miyohei Shinohara, eds. 1979. Patterns of Japanese Economic Development: A Quantitative Appraisal. New Haven: Yale University Press.

Rawski, Thomas G. 2001a. "China By the Numbers: How Reform Has Affected China's Economic Statistics." China Perspectives, no. 33 (January-February), pp. 25-34 (also available from www.pitt.edu/~tgrawski/papers2000).

Rawski, Thomas G. 2001b. "China's GDP Statistics: A Case of Caveat Lector?" available from www.pitt.edu/~tgrawski/papers2001; abbreviated version published as "The Credibility Gap: China's Recent GDP Statistics," China Economic Quarterly 5.1: 18-22.

Ren, Ruoen. 1997. China's Economic Performance in International Perspective. Paris: OECD. Smith, Craig S. 2001. "China Reports 7.8% Growth in Economy." New York Times, 18 July 2001, W1. Taiwan, Yearbook. 1983. Zhonghua minguo 71-nian tongji tiyao [Statistical Yearbook of the Republic of China for 1982]. Taipei: Xingzheng yuan, zhuji chu. Tao, Chunmei. 2000. "Influence of Wid ening Income Disparities on the Operation of China's Economy." Jiage lilun yu shijian [Price Theory and Practice] (10):13-14. Wang, Chuandong. 1999. "State to Bolster Demand." China Daily, 29 April 1999, 1.

Wang, Xiaoya. 2000. "Analysis of the Current Economic Situation." Caimao jingji [Finance and Trade Economics] (4):5-10. Xu, Binglan. 1999. "Statisticians Seek Reliability." China Daily Business Weekly, 15 February 1999, 1. Xu, Lixin Colin, and Hengfu Zou. 2000. "Explaining the Changes of Income Distribut ion in China." China Economic Review. 11 (2):149-170. Yearbook. 1999. Zhongguo tongji nianjian 1999 [China Statistical Yearbook 1999]. Beijing: Zhongguo tongji chubanshe. Yearbook. 2000. Zhongguo tongji nianjian 2000 [China Statistical Yearbook 2000]. Beijing: Zhongguo tongji chubanshe. Zhang, Ping. 2000. "Income Differentials, Interest Rate, and Consumption." Caimao jingji [Finance and Trade Economics] (8):16-22. Zhao, Huanxin. 1999. "Aviation Sector to Make Profit." China Daily, 18 August 1999, 2.

^* Professor of Economics, University of Pittsburgh, Pittsburgh PA 15260.

¹ [Yearbook 2000], pp. 55, 246; [Abstract 2001] pp. 7, 130.

1            Agricultural output data from [Yearbook 1999], p. 382.  For classification of the 1998 floods among the top ten natural disasters of the 20^th century, see Zhongguo tongji [China Statistics], no. 8 (1999), p. 38.

2            Industrial output value and physical commodity output for 1997/98 from [Yearbook 1999], pp. 424 and 445-446.

3            Investment spending and cement output from [Yearbook 1999], pp. 183 and 446; increased steel consumption of "about 4 percent" from Zhongguo wujia [China Price], no. 3, 1999, p. 8.

4            For further examples, see [Meng 1999].

⁶ [Growth 2000], p. 1.

⁷ The exception is the figure showing that that rural per capita cash expenditure on consumption rose by 12.2 percent during 1999/2000. This result is incons istent with reports that rural per capita net income rose by only 1.9 percent during 1999/2000 [[Abstract 2001], p. 96].  There is also an internal inconsistency in the source, which shows a drop in per capita cash outlay of RMB 197.7 or 8.4 percent during 1999/2000 together with increases of RMB80 and RMB140.1 in expenditure on production and on consumption respectively [[Indicators 2001], pp. 88-89].

⁸ For further examples and discussion, see [Rawski (2001a, 2001b)].

⁹ Commenting on an earlier paper (Rawski 2001a), an NBS official said something like: “If you believe that we at NBS cannot measure China’s GDP, what makes you think you can do better?”

¹⁰ In February 1999, “the CAAC [Civil Aviation Administration of China] and the State Development Planning Commission issued an urgent circular that put a halt to selling domestic air tickets at unreasonable discount prices” [Zhao 1999].

¹¹ Note that both the number of overseas travelers arriving in China and China’s income from international tourism increased during 1997/98, although more slowly than in prior years [Zhongguo tongji [China Statistics], no. 11 (2000), p. 48]. 

*The China Dream：

The Quest for the Last Great Untapped Market on Earth

01/2002｜Joe Studwell
除了早些时候的《谁来养活中国》一书外，2002年1月，美国《中国经济》季刊的创办人和主编斯塔德维尔（Joe Studwell）在今年１月出版的《中国梦》一书中说，中国经济就好像一座建立在沙滩上的大厦，很不牢固，他预言中国将出现大规模的政治和经济危机。台湾的李登辉也公开地遥相呼应，警告台湾那些要到大陆投资办厂的商家要慎重，不然会“哭着回来”。

*China growth statistics 'false'
18/07/2013｜ADAM CREIGHTON｜The Australian

A LEADING China analyst claims the country's economy is barely growing at all and that the official growth statistics are concocted to suit the Chinese government.

Anne Stevenson-Yang, founder of Beijing-based J Capital Research, told an economics conference in Sydney yesterday that China's GDP statistics, which investors anxiously await, were politically influenced.

"China's GDP growth target isn't generated by the statistics; the statistics are generated by the target -- it's a political system" she said.

Ms Stevenson-Yang, a guest of the Economist Intelligence Unit which hosted the conference, said: "For the most part they are very, very unreliable and there's a widening gap with what you find on the ground."

She suggested actual Chinese consumption growth was stagnant or shrinking despite official statistics saying it was growing by more than 10 per cent a year.

"By many standards you could say that China is actually not growing at all," she said.

Fellow panelist Geoff Raby, former Australian ambassador to China, had much more confidence in the official statistics, but conceded China was clearly slowing.

Mr Raby, who is on the board of Australian miner Fortescue Metals, said the high iron ore price of about $130 a tonne this year indicated Chinese demand was still strong.

"Bear in mind the economy there is twice the size it was seven years ago, so so-called slow Chinese growth of 6 or 7 per cent is now coming off a massive base," Mr Raby said, arguing that Australia should be insulated against any fall in commodity prices by rising volumes.

Mr Raby, now head of advisory firm Raby & Associates, nevertheless said the practice of continually tweaking official growth forecasts -- as the IMF did -- was "nonsense" because of the inherent uncertainty.

Simon Baptist, Asian director for the EIU, said there were "growing suspicions that Chinese GDP data are being distorted by officials in order to ensure that they meet the 7.5 per cent official target for GDP growth this year".

"But lower growth will not necessarily cause social tension, as a shrinking working-age population will keep unemployment in check while still allowing for wage rises," he said.

Mr Raby said China was finally showing signs of structural change, driven less by exports and more by domestic consumption.

Ms Stevenson-Yang said about 50 per cent of the "new credit" was debt being rolled over.

*Is China faking its economic growth?

16/02/2012｜CNNMoney 

NEW YORK (CNNMoney) -- Influential short-seller Jim Chanos is still on a China rampage.

Known for predicting the Enron collapse, the chief of Manhattan-based Kynikos Associates, has been betting on a Chinese slowdown for a few years now, and once famously remarked, the world's second largest economy is on a "treadmill to hell."

He thinks the Chinese government is understating its inflation problem -- thereby making its economy look stronger than it actually is.

"One of the things I'm pretty convinced of based on our analysis, is that inflation is under-reported in China by as much as 4 to 5% a year," he told CNNMoney's Poppy Harlow in an interview.

China's official statistics office recently reported that the country's inflation rate had risen to 4.5% for the 12 months ending in January.

Overall, inflation has cooled since July, when it was up 6.5% year-over-year.

Taming rapidly rising prices had previously been one of the country's top priorities, but now as the inflation rate has fallen, many investors believe it opens the door for China's central bank to shift to looser monetary policies.

Where the candidates stand on China

If Chanos is right and the Chinese government is under-reporting its inflation data, its measure of economic growth would also be off-kilter. The latest government data shows the Chinese economy grew at an 8.9% annual pace in the fourth quarter, only slightly weaker than the typical 9% to 10% growth rates it has seen over the last few years.

While economists are often skeptical of China's government figures, Chanos estimates those numbers are way off.

"We are seeing rapid falloffs in demand in things like construction equipment, railway construction over there, housing sales -- so lots of things are slowing down pretty quickly over there," he said.

"It remains to be seen whether that's going to go into a full-fledged recession. I do think the property sector which is where we're focused on, is going to enter -- or has entered a recession." 

*China Export Gains Seen Halved With Fake-Data Crackdown

06/06/2013｜Bloomberg News 

China’s crackdown on fake export invoices used to disguise money flows is probably cutting the nation’s trade figures, revealing subdued global demand that will weigh on economic growth.

Outbound shipments may have grown 7.1 percent in May from a year earlier, less than half the previous month’s reported 14.7 percent, based on the median estimate of 34 economists ahead of data due June 8. Import growth probably slowed to 6.9 percent from April’s 16.8 percent, aBloomberg News survey showed.

Successful deterrence of fraudulent data through regulatory scrutiny of companies and banks would help restore trust in trade figures, while more accurate numbers may also highlight the urgency for Premier Li Keqiang to shift growth toward domestic consumption. Weakness in exports could also test Li’s reluctance to add stimulus to support the expansion of the world’s second-biggest economy.

“The crackdown from China’s foreign-exchange authorities on fake invoicing will bring the inflated export growth down to the real trend, which is single digits,” said Zhang Zhiwei, chief China economist at Nomura Holdings Inc. in Hong Kong, who projects export gains of 5 percent for May. More broadly,China’s economy “is weakening but is not collapsing,” said Zhang, who previously worked at the International Monetary Fund.

Then MSCI Asia Pacific Index of stocks was down 1.2 percent as of 4:19 p.m. in Tokyo today.

Inflation Figures

The trade data from the General Administration of Customs will be followed June 9 by National Bureau of Statistics releases on prices, industrial production, retail sales and investment that are forecast to show little change from April growth figures. New yuan loans may have increased to 850 billion yuan ($139 billion) from April’s 792.9 billion yuan in People’s Bank of China numbers due over the next week, based on the median estimate in a Bloomberg News survey.

The benchmark Shanghai Composite Index of stocks has declined for six days, the longest losing streak since June 2012, amid concern that economic growth is losing steam. The gauge lost 1.3 percent today, the most in six weeks.

Economists in a separate survey last month said January-April export growth was overstated by 4 to 13 percentage points. Shipments abroad probably rose 8.5 percent in the first four months of 2013 from a year earlier, based on the median estimate of 15 economists, less than half the official 17.4 percent number. Imports may have gained 8.25 percent, according to 14 analysts’ median estimate, compared with the government’s 10.6 percent figure.

PMI Gauge

The figures compare with South Korea’s reported 1 percent increase in exports in the first five months of 2013 and a 1.3 percent January-April gain reported by Taiwan. China’s officialPurchasing Managers’ Index (SHCOMP) for manufacturing has shown new export orderscontracting for four of the past five months.

Slower growth in last month’s official trade data may reflect measures announced by China’sState Administration of Foreign Exchange to crack down on speculative funds entering the country disguised as payments for trade.

The currency regulator said May 6 that it will send out warning notices to companies whose goods and capital flows don’t match as well as those bringing large amounts of cash into China. SAFE on May 22 told banks to improve checks of customer documents related to special trade zones amid speculation that the areas have been exploited to mask money inflows as exports.

Double-counting in the zones probably continued to inflate May’s figures, said Steve Wang, chief China economist in Hong Kong for Reorient Financial Markets Ltd., an investment bank backed by the Chinese government. While exports probably rose 9.3 percent in May, the true rate may be close to 4.6 percent excluding distortions from double-counting in the zones, Wang said.

Fraud Probe

The customs administration didn’t respond to faxed questions yesterday from Bloomberg News or to other inquiries on the issue since it held a press briefing on April 10. Zheng Yuesheng, an agency spokesman, said at the time that China is investigating possible fraud behind first-quarter export growth and that the practice of false trade declarations “does exist but is definitely not mainstream.”

Some Chinese exports face other issues. The European Union this week said tariffs of as much as 67.9 percent could be imposed on solar panels from China in the largest EU commercial dispute of its kind, affecting Chinese companies like Yingli Green Energy Holding Co., Wuxi Suntech Power Co. and Changzhou Trina Solar Energy Co.

Reserve Ratio

The slowdown may be too much for the government to stomach, said Hu Yifan, chief economist at Haitong International Securities Co. in Hong Kong, who previously worked at the World Bank. Authorities may start “active supportive policies,” including a cut this month in banks’ reserve-requirement ratio, said Hu, the only analyst surveyed to project a May decline in exports.

China’s gross domestic product expanded a less-than-estimated 7.7 percent in the first quarter and analysts last month trimmed forecasts for the April-June period to a median projection of 7.8 percent. The government in March set a goal of 7.5 percent for the year.

“The pressure on the Chinese leadership may grow to do more to boost domestic demand,” such as faster approvals of investment projects, said Sun Junwei, a Beijing-based economist at HSBC Holdings Plc. “The government doesn’t want another stimulus package, but it won’t like a deepening slowdown either.”

Around the world today, U.K. house prices rose for a fourth month in May as government measures to help the property market boosted demand, according to Halifax, the mortgage unit of Lloyds Banking Group Plc. Other releases today include U.S. jobless claims and factory orders in Germany.

The Bank of England will probably decide to hold its target for bond purchases at 375 billion pounds ($577 billion), according to a Bloomberg News survey of economists. The European Central Bank will keep its benchmark interest rate unchanged at 0.5 percent today, according to a survey of analysts.

*China's economy Not just another fake

14/01/2010｜The Economist 

CHINA rebounded more swiftly from the global downturn than any other big economy, thanks largely to its enormous monetary and fiscal stimulus. In the year to the fourth quarter of 2009, its real GDP is estimated to have grown by more than 10%. But many sceptics claim that its recovery is built on wobbly foundations. Indeed, they say, China now looks ominously like Japan in the late 1980s before its bubble burst and two lost decades of sluggish growth began. Worse, were China to falter now, while the recovery in rich countries is still fragile, it would be a severe blow not just at home but to the whole of the world economy.

On the face of it, the similarities between China today and bubble-era Japan are worrying. Extraordinarily high saving and an undervalued exchange rate have fuelled rapid export-led growth and the world's biggest current-account surplus. Chronic overinvestment has, it is argued, resulted in vast excess capacity and falling returns on capital. A flood of bank lending threatens a future surge in bad loans, while markets for shares and property look dangerously frothy.

Just as in the late 1980s, when Japan's economy was tipped to overtake America's, China's strong rebound has led many to proclaim that it will become number one sooner than expected. In contrast, a recent flurry of bearish reports warn that China's economy could soon implode. James Chanos, a hedge-fund investor (and one of the first analysts to spot that Enron's profits were pure fiction), says that China is “Dubai times 1,000, or worse”. Another hedge fund, Pivot Capital Management, argues that the chances of a hard landing, with a slump in capital spending and a banking crisis, are increasing.

Scary stuff. However, a close inspection of pessimists' three main concerns—overvalued asset prices, overinvestment and excessive bank lending—suggests that China's economy is more robust than they think. Start with asset markets. Chinese share prices are nowhere near as giddy as Japan's were in the late 1980s. In 1989 Tokyo's stockmarket had a price-earnings ratio of almost 70; today's figure for Shanghai A shares is 28, well below its long-run average of 37. Granted, prices jumped by 80% last year, but markets in other large emerging economies went up even more: Brazil, India and Russia rose by an average of 120% in dollar terms. And Chinese profits have rebounded faster than those elsewhere. In the three months to November, industrial profits were 70% higher than a year before.

China's property market is certainly hot. Prices of new apartments in Beijing and Shanghai leapt by 50-60% during 2009. Some lavish projects have much in common with those in Dubai—notably “The World”, a luxury development in Tianjin, 120km (75 miles) from Beijing, in which homes will be arranged as a map of the world, along with the world's biggest indoor ski slope and a seven-star hotel.

Average home prices nationally, however, cannot yet be called a bubble. On January 14th the National Development and Reform Commission reported that average prices in 70 cities had climbed by 8% in the year to December, the fastest pace for 18 months; other measures suggest a bigger rise. But this followed a fall in prices in 2008. By most measures average prices have fallen relative to incomes in the past decade (see chart 1).

The most cited evidence of a bubble—and hence of impending collapse—is the ratio of average home prices to average annual household incomes. This is almost ten in China; in most developed economies it is only four or five. However, Tao Wang, an economist at UBS, argues that this rich-world yardstick is misleading. Chinese homebuyers do not have average incomes but come largely from the richest 20-30% of the urban population. Using this group's average income, the ratio falls to rich-world levels. In Japan the price-income ratio hit 18 in 1990, obliging some buyers to take out 100-year mortgages.

Furthermore, Chinese homes carry much less debt than Japanese properties did 20 years ago. One-quarter of Chinese buyers pay cash. The average mortgage covers only about half of a property's value. Owner-occupiers must make a minimum deposit of 20%, investors one of 40%. Chinese households' total debt stands at only 35% of their disposable income, compared with 130% in Japan in 1990.

China's property boom is being financed mainly by saving, not bank lending. According to Yan Wang, an economist at BCA Research, a Canadian firm, only about one-fifth of the cost of new construction (commercial and residential) is financed by bank lending. Loans to homebuyers and property developers account for only 17% of Chinese banks' total, against 56% for American banks. A bubble pumped up by saving is much less dangerous than one fuelled by credit. When the market begins to crack, highly leveraged speculators are forced to sell, pushing prices lower, which causes more borrowers to default.

Even if China does not (yet) have a credit-fuelled housing bubble, the fact that property prices in Beijing and Shanghai are beyond the reach of most ordinary people is a serious social problem. The government has not kept its promise to build more low-cost housing, and it is clearly worried about rising prices. In an attempt to thwart speculators, it has reimposed a sales tax on homes sold within five years, has tightened the stricter rules on mortgages for investment properties and is trying to crack down on illegal flows of foreign capital into the property market. The government does not want to come down too hard, as it did in 2007 by cutting off credit, because it needs a lively property sector to support economic recovery. But if it does not tighten policy soon, a full-blown bubble is likely to inflate.

The world's capital

China's second apparent point of similarity to Japan is overinvestment. Total fixed investment jumped to an estimated 47% of GDP last year—ten points more than in Japan at its peak. Chinese investment is certainly high: in most developed countries it accounts for around 20% of GDP. But you cannot infer waste from a high investment ratio alone. It is hard to argue that China has added too much to its capital stock when, per person, it has only about 5% of what America or Japan has. China does have excess capacity in some industries, such as steel and cement. But across the economy as a whole, concerns about overinvestment tend to be exaggerated.

Pivot Capital Management points to China's incremental capital-output ratio (ICOR), which is calculated as annual investment divided by the annual increase in GDP, as evidence of the collapsing efficiency of investment. Pivot argues that in 2009 China's ICOR was more than double its average in the 1980s and 1990s, implying that it required much more investment to generate an additional unit of output. However, it is misleading to look at the ICOR for a single year. With slower GDP growth, because of a collapse in global demand, the ICOR rose sharply everywhere. The return to investment in terms of growth over a longer period is more informative. Measuring this way, BCA Research finds no significant increase in China's ICOR over the past three decades.

Mr Chanos has drawn parallels between China and the huge misallocation of resources in the Soviet Union, arguing that China is heading the same way. The best measure of efficiency is total factor productivity (TFP), the increase in output not directly accounted for by extra inputs of capital and labour. If China were as wasteful as Mr Chanos contends, its TFP growth would be negative, as the Soviet Union's was. Yet over the past two decades China has enjoyed the fastest growth in TFP of any country in the world.

Even in industries which clearly do have excess capacity, China's critics overstate their case. A recent report by the European Union Chamber of Commerce in China estimates that in early 2009 the steel industry was operating at only 72% of capacity. That was at the depth of the global downturn. Demand has picked up strongly since then. The report claims that the industry's overcapacity is illustrated by “a startling figure”: in 2008, China's output of steel per person was higher than America's. So what? At China's stage of industrialisation it should use a lot of steel. A more relevant yardstick is the America of the early 20th century. According to Ms Wang of UBS, China's steel capacity of almost 0.5 tonnes per person is slightly lower than America's output in 1920 (0.6 tonnes) and far below Japan's peak of 1.1 tonnes in 1973.

Many commentators complain that China's capital-spending spree last year has merely exacerbated its industrial overcapacity. However, the boom was driven mainly by infrastructure investment, whereas investment in manufacturing slowed quite sharply (see chart 2). Given the scale of the spending, some money is sure to have been wasted, but by and large, investment in roads, railways and the electricity grid will help China sustain its growth in the years ahead.

Some analysts disagree. Pivot, for instance, argues that China's infrastructure has already reached an advanced level. It has six of the world's ten longest bridges and it boasts the world's fastest train; there is little room for further productive investment. That is nonsense. A country in which two-fifths of villages lack a paved road to the nearest market town still has plenty of scope for building roads. The same goes for railways. Again, a comparison of China today with the America of a century ago is pertinent. China has roughly the same land area as America, but 13 times more people than the United States did then. Yet on current plans it will have only 110,000km of railway by 2012, compared with more than 400,000km in America in 1916. Unlike Japan, which built “bridges to nowhere” to prop up its economy, China needs better infrastructure.

It is true that in the short term, the revenue from some infrastructure projects may not be enough to service debts, so the government will have to cover losses. But in the long term such projects should lift productivity across the economy. During Britain's railway mania in the mid-19th century, few railways made a decent financial return, but they brought huge long-term economic benefits.

The biggest cause for worry about China is the third point of similarity to Japan: the recent tidal wave of bank lending. Total credit jumped by more than 30% last year. Even assuming that this slows to less than 20% this year, as the government has hinted, total credit outstanding could hit 135% of GDP by December. The authorities are perturbed. This week they increased banks' reserve requirement ratio by half a percentage point. They have also raised the yield on central-bank bills.

However, too many commentators talk as if Chinese banks have been on a lending binge for years. Instead, the spurt in 2009, which was engineered by the government to revive the economy, followed several years in which credit grew more slowly than GDP (see chart 3). Michael Buchanan, of Goldman Sachs, estimates that since 2004 China's excess credit (the gap between the growth rates of credit and nominal GDP) has risen by less than in most developed economies.

Even so, recent lending has been excessive; combined with overcapacity in some industries, it is likely to cause an increase in banks' non-performing loans. Ms Wang calculates that if 20% of all new lending last year and another 10% of this year's lending turned bad, this would create new bad loans equivalent to 5.5% of GDP by 2012, on top of 2% now. That is far from trivial, but well below the 40% of GDP that bad loans amounted to in the late 1990s.

Much of the past year's bank lending should really be viewed as a form of fiscal stimulus. Infrastructure projects that have little hope of repaying loans will end up back on the government's books. It would have been much better if such projects had been financed more transparently through the government's budget, but the important question is whether the state can afford to cover the losses.

Official gross government debt is less than 20% of GDP, but China bears argue that this is an understatement, because it excludes local-government debt and the bonds issued by the asset-management companies that took over banks' previous non-performing loans. Total government debt could be 50% of GDP. But that is well below the average ratio in rich countries, of around 90%. Moreover, the Chinese government owns lots of assets, for example shares of listed companies which are worth 35% of GDP.

Yin and yang

Even if, as argued above, concerns about a financial crash in China are premature, the risks of a dangerous bubble and excessive investment will clearly increase if credit continues to expand at its recent pace. The stitching on the Chinese economy could fray and burst. Would that imply the end of China's era of rapid growth?

Predictions that China is heading for a prolonged Japanese-style slump ignore big differences between China today and Japan in the late 1980s. Japan was already a mature, developed economy, with a GDP per person close to that of America. China is still a poor, developing country, whose GDP per person is less than one-tenth of America's or Japan's. It has ample room to play catch-up with rich economies by adding to its capital stock, importing foreign technology and boosting productivity by shifting labour from farms to factories. This would make it easier for China to recover from the bursting of a bubble.

Chart 4 examines the relationship between growth rates and income per head for six Asian economies. Each plot shows a country's growth rate and GDP per person relative to America's for successive ten-year periods, starting when their rapid growth took off. It illustrates how growth rates slow as economies catch up with America, the technological leader. The fact that China's GDP per head is much lower than Japan's in the 1980s suggests that its growth potential over the next decade is much higher. Even though China's labour force will start shrinking after 2016, rapid productivity gains mean that its trend GDP growth rate is still around 8%, down from 10% in the past decade.

Japan's stockmarket and land-price bubbles in the early 1960s offer a better (and more cheerful) analogy to China than the 1980s bubble era does. Japan's economy was poorer then, although relative to America its GDP per person was more than double China's today, and its trend rate of growth was around 9%. According to HSBC, after the bubble burst in 1962-65, Japan's annual growth rate dipped to just under 6%, but then quickly rebounded to 10% for much of the next decade.

South Korea and Taiwan, which experienced big stockmarket bubbles in the 1980s, are also worth examining. In the five years to 1990, Taipei's stockmarket surged by 1,600% (in dollar terms) and Seoul's by 700%, easily beating Tokyo's 450% gain in the same period. After share prices slumped, annual growth in both South Korea and Taiwan slowed to around 6%, but soon regained its previous pace of 7-8%.

The higher a country's potential growth rate, the easier it is for the economy to recover after a bubble bursts, so long as its fiscal and external finances are in reasonable shape. Rapid growth in nominal GDP means that asset prices do not need to fall so far to regain fair value, bad loans are easier to work off and excess capacity can be more quickly absorbed by rising demand. The experience of Japan in the 1960s suggests that if China's bubble bursts, it will hurt growth temporarily but not lead to prolonged stagnation.

However, it is Japan's experience after the 1980s that most influences the thinking of policymakers in Beijing. Many blame Japan's deflation and its lost decades of growth on the fact that its government caved in to American demands for an appreciation of the yen. In 1985 central banks in the big rich economies agreed, in the Plaza Accord, to intervene to push down the dollar. By 1988 the yen had risen by more than 100% against the greenback. One reason why policymakers in Beijing have resisted a big rise in the yuan is that they fear it could send their economy, like Japan's, into a deflationary slump.

The wrong lesson

Yet Japan's real mistake was not that it allowed the yen to rise, but that it had previously resisted an appreciation for too long, so that when it did happen the yen soared. A second error was that Japan tried to offset the adverse economic effects of a strong yen with over-lax monetary policy. If policy had been tighter, the financial bubble would have been smaller and its aftermath less painful.

This offers two important lessons to China. First, it is better to let the exchange rate rise sooner and more gradually than to risk a much sharper appreciation later. Second, monetary policy should not be too slack. Raising reserve requirements is a small step in the right direction. Despite the bears' growling, China's economic collapse is neither imminent nor inevitable. But if it continues to draw the wrong lesson from the tale of Japan, then one day its economy may look just as tatty.

*The End Of The Chinese Economic Miracle

23/07/2013｜George Friedman |Forbes

Major shifts underway in the Chinese economy that Stratfor has forecast and discussed for years have now drawn the attention of the mainstream media. Many have asked when China would find itself in an economic crisis, to which we have answered that China has been there for awhile — something not widely recognized outside China, and particularly not in the United States. A crisis can exist before it is recognized. The admission that a crisis exists is a critical moment, because this is when most others start to change their behavior in reaction to the crisis. The question we had been asking was when the Chinese economic crisis would finally become an accepted fact, thus changing the global dynamic.

Last week, the crisis was announced with a flourish. First, The New York Times columnist and Nobel Prize-recipient Paul Krugman penned a piece titled “Hitting China’s Wall.” He wrote, “The signs are now unmistakable: China is in big trouble. We’re not talking about some minor setback along the way, but something more fundamental. The country’s whole way of doing business, the economic system that has driven three decades of incredible growth, has reached its limits. You could say that the Chinese model is about to hit its Great Wall, and the only question now is just how bad the crash will be.”

Later in the week, Ben Levisohn authored a column in Barron’s called “Smoke Signals from China.” He wrote, “In the classic disaster flick ‘The Towering Inferno’ partygoers ignored a fire in a storage room because they assumed it has been contained. Are investors making the same mistake with China?” He goes on to answer his question, saying, “Unlike three months ago, when investors were placing big bets that China’s policymakers would pump cash into the economy to spur growth, the markets seem to have accepted the fact that sluggish growth for the world’s second largest economy is its new normal.”

Meanwhile, Goldman Sachs — where in November 2001 Jim O’Neil coined the term BRICs and forecast that China might surpass the United States economically by 2028 — cut its forecast of Chinese growth to 7.4 percent.

The New York Times, Barron’s and Goldman Sachs are all both a seismograph of the conventional wisdom and the creators of the conventional wisdom. Therefore, when all three announce within a few weeks that China’s economic condition ranges from disappointing to verging on a crash, it transforms the way people think of China. Now the conversation is moving from forecasts of how quickly China will overtake the United States to considerations of what the consequences of a Chinese crash would be.

Doubting China

Suddenly finding Stratfor amid the conventional wisdom regarding China does feel odd, I must admit. Having first noted the underlying contradictions in China’s economic growth years ago, when most viewed China as the miracle Japan wasn’t, and having been scorned for not understanding the shift in global power underway, it is gratifying to now have a lot of company. Over the past couple of years, the ranks of the China doubters had grown. But the past few months have seen a sea change. We have gone from China the omnipotent, the belief that there was nothing the Chinese couldn’t work out, to the realization that China no longer works.

It has not been working for some time. One of the things masking China’s weakening has been Chinese statistics, which Krugman referred to as “even more fictional than most.” China is a vast country in territory and population. Gathering information on how it is doing would be a daunting task, even were China inclined to do so. Instead, China understands that in the West, there is an assumption that government statistics bear at least a limited relationship to truth. Beijing accordingly uses its numbers to shape perceptions inside and outside China of how it is doing. The Chinese release their annual gross domestic product numbers in the third week of January (and only revise them the following year). They can’t possibly know how they did that fast, and they don’t. But they do know what they want the world to believe about their growth, and the world has believed them — hence, the fantastic tales of economic growth.

China in fact has had an extraordinary period of growth. The last 30 years have been remarkable, marred only by the fact that the Chinese started at such a low point due to the policies of the Maoist period. Growth at first was relatively easy; it was hard for China to do worse. But make no mistake: China surged. Still, basing economic performance on consumption, Krugman notes that China is barely larger economically than Japan. Given the compounding effects of China’s guesses at GDP, we would guess it remains behind Japan, but how can you tell? We can say without a doubt that China’s economy has grown dramatically in the past 30 years but that it is no longer growing nearly as quickly as it once did.

China’s growth surge was built on a very unglamorous fact: Chinese wages were far below Western wages, and therefore the Chinese were able to produce a certain class of products at lower cost than possible in the West. The Chinese built businesses around this, and Western companies built factories in China to take advantage of the differential. Since Chinese workers were unable to purchase many of the products they produced given their wages, China built its growth on exports.

For this to continue, China had to maintain its wage differential indefinitely. But China had another essential policy: Beijing was terrified of unemployment and the social consequences that flow from it. This was a rational fear, but one that contradicted China’s main strength, its wage advantage. Because the Chinese feared unemployment, Chinese policy, manifested in bank lending policies, stressed preventing unemployment by keeping businesses going even when they were inefficient. China also used bank lending to build massive infrastructure and commercial and residential property. Over time, this policy created huge inefficiencies in the Chinese economy. Without recessions, inefficiencies develop. Growing the economy is possible, but not growing profitability. Eventually, the economy will be dragged down by its inefficiency.

Inflation vs. Unemployment

As businesses become inefficient, production costs rise. And that leads to inflation. As money is lent to keep inefficient businesses going, inflation increases even more markedly. The increase in inefficiency is compounded by the growth of the money supply prompted by aggressive lending to keep the economy going. As this persisted over many years, the inefficiencies built into the Chinese economy have become staggering.

The second thing to bear in mind is the overwhelming poverty of China, where 900 million people have an annual per capita income around the same level as Guatemala, Georgia, Indonesia or Mongolia ($3,000-$3,500 a year), while around 500 million of those have an annual per capita income around the same level as India, Nicaragua, Ghana, Uzbekistan or Nigeria ($1,500-$1,700). China’s overall per capita GDP is around the same level as the Dominican Republic, Serbia, Thailand or Jamaica. Stimulating an economy where more than a billion people live in deep poverty is impossible. Economic stimulus makes sense when products can be sold to the public. But the vast majority of Chinese cannot afford the products produced in China, and therefore, stimulus will not increase consumption of those products. As important, stimulating demand so that inefficient factories can sell products is not only inflationary, it is suicidal. The task is to increase consumption, not to subsidize inefficiency.

The Chinese are thus in a trap. If they continue aggressive lending to failing businesses, they get inflation. That increases costs and makes the Chinese less competitive in exports, which are also falling due to the recession in Europe and weakness in the United States. Allowing businesses to fail brings unemployment, a massive social and political problem. The Chinese have zigzagged from cracking down on lending by regulating informal lending and raising interbank rates to loosening restrictions on lending by removing the floor on the benchmark lending rate and by increasing lending to small- and medium-sized businesses. Both policies are problematic.

The Chinese have maintained a strategy of depending on exports without taking into account the operation of the business cycle in the West, which means that periodic and substantial contractions of demand will occur. China’s industrial plant is geared to Western demand. When Western demand contracted, the result was the mess you see now.

The Chinese economy could perhaps be growing at 7.4 percent, but I doubt the number is anywhere near that. Some estimates place growth at closer to 5 percent. Regardless of growth, the ability to maintain profit margins is rarely considered. Producing and selling at or even below cost will boost GDP numbers but undermines the financial system. This happened to Japan in the early 1990s. And it is happening in China now.

The Chinese can prevent the kind of crash that struck East Asia in 1997. Their currency isn’t convertible, so there can’t be a run on it. They continue to have a command economy; they are still communist, after all. But they cannot avoid the consequences of their economic reality, and the longer they put off the day of reckoning, the harder it will become to recover from it. They have already postponed the reckoning far longer than they should have. They would postpone it further if they could by continuing to support failing businesses with loans. They can do that for a very long time — provided they are prepared to emulate the Soviet model’s demise. The Chinese don’t want that, but what they do want is a miraculous resolution to their problem. There are no solutions that don’t involve agony, so they put off the day of reckoning and slowly decline.

China’s Transformation

The Chinese are not going to completely collapse economically any more than the Japanese or South Koreans did. What will happen is that China will behave differently than before. With no choices that don’t frighten them, the Chinese will focus on containing the social and political fallout, both by trying to target benefits to politically sensitive groups and by using their excellent security apparatus to suppress and deter unrest. The Chinese economic performance will degrade, but crisis will be avoided and political interests protected. Since much of China never benefited from the boom, there is a massive force that has felt marginalized and victimized by coastal elites. That is not a bad foundation for the Communist Party to rely on.

The key is understanding that if China cannot solve its problems without unacceptable political consequences, it will try to stretch out the decline. Japan had a lost decade only in the minds of Western investors, who implicitly value aggregate GDP growth over other measures of success such as per capita GDP growth or full employment. China could very well face an extended period of intense inwardness and low economic performance. The past 30 years is a tough act to follow.

The obvious economic impact on the rest of the world will fall on the producers of industrial commodities such as iron ore. The extravagant expectations for Chinese growth will not be met, and therefore expectations for commodity prices won’t be met. Since the Chinese economic failure has been underway for quite awhile, the degradation in prices has already happened. Australia in particular has been badly hit by the Chinese situation, just as it was by the Japanese situation a generation ago.

The Chinese are, of course, keeping a great deal of money in U.S. government instruments and other markets. Contrary to fears, that money will not be withdrawn. The Chinese problem isn’t a lack of capital, and repatriating that money would simply increase inflation. Had the Chinese been able to put that money to good use, it would have never been invested in the United States in the first place. The outflow of money from China was a symptom of the disease: Lacking the structure to invest in China, the government and private funds went overseas. In so doing, Beijing sought to limit destabilization in China, while private Chinese funds looked for a haven against the storm that was already blowing.

Rather than the feared repatriation of funds, the United States will continue to be the target of major Chinese cash inflows. In a world where Europe is still reeling, only the United States is both secure and large enough to contain Chinese appetites for safety. Just as Japanese investment in the 1990s represented capital flight rather than a healthy investment appetite, so the behavior we have seen from Chinese investors in recent years is capital flight: money searching for secure havens regardless of return. This money has underpinned American markets; it is not going away, and in fact more is on the way.

The major shift in the international order will be the decline of China’s role in the region. China’s ability to project military power in Asia has been substantially overestimated. Its geography limits its ability to project power in Eurasia, an endeavor that would require logistics far beyond China’s capacity. Its naval capacity is still limited compared with the United States. The idea that it will compensate for internal economic problems by genuine (as opposed to rhetorical) military action is therefore unlikely. China has a genuine internal security problem that will suck the military, which remains a domestic security force, into actions of little value. In our view, the most important shift will be the re-emergence of Japan as the dominant economic and political power in East Asia in a slow process neither will really want.

China will continue to be a major power, and it will continue to matter a great deal economically. Being troubled is not the same as ceasing to exist. China will always exist. It will, however, no longer be the low-wage, high-growth center of the world. Like Japan before it, it will play a different role.

In the global system, there are always low-wage, high-growth countries because the advanced industrial powers’ consumers want to absorb goods at low wages. Becoming a supplier of those goods is a major opportunity for, and disruptor to, those countries. No one country can replace China, but China will be replaced. The next step in this process is identifying China’s successors.

*Will China's economy crash?

29/07/2013｜Michael Pettis |CNN

(CNN) -- After many years of euphoria over China's rapid growth and the country's apparently inevitable rise to global economic dominance, the China story has taken a serious turn for the worse. China, it now seems, is about to collapse, and along the way it may well bring the world economy down with it.

Fortunately, the new story may be as muddled as the old one.

China's economic model has relied heavily on investment and debt. It shouldn't be a surprise that after many years of tremendous growth driven at first by badly needed investments, Chinese spending on infrastructure and manufacturing capacity is slowing down.

During the same period, debt levels surged as borrowed money poured into more highways, airports, steel mills, shipyards, high-speed railways, and apartment and office buildings than the country could productively use.

A few economists predicted as far back as 2006 that China would face a serious debt problem. By 2010, it became obvious even to the most excited of China bulls that this was indeed happening.

To protect itself from the risk of a debt crisis, China must bring spending to a halt. Beijing now wants to rebalance the economy away from its excessive reliance on investment and debt, and to increase the role of consumption as a driver of growth.

But this cannot happen except at lower growth rates.

So what happens next -- will China collapse? Probably not. A financial collapse is effectively a kind of bank run, and as long as government credibility remains high, banks are guaranteed and capital controls are maintained, it is unlikely that China will experience anything like a bank run.

What is far more likely is that in the coming years, China's gross domestic product growth rate will continue to decline as the country focuses on stimulating consumption.

Growth rates during the administration of President Xi Jinping are unlikely to exceed 3% to 4% on average if the economic rebalancing is managed well.

Will the slower growth rate be a disaster for China? Certainly, it would be huge departure from the growth rate of roughly 10% a year for nearly three decades. Would much lower growth rates create high unemployment and huge dislocations for the economy? Some are worried about such scenarios. But the Chinese economy has so far shown a lot of resilience despite passing storms such as the global financial crisis.

Beijing has huge challenges ahead. China's growth has been a boon to large businesses, the state, the powerful and the wealthy elite. What the Chinese government needs to do is recalibrate growth so that average household incomes can rise and consumers have more money to spend.

This will not be easy to pull off, but there are positive signs. Xi's government seems determined to make the necessary changes, even at the expense of much slower growth.

Even if GDP growth declines but average Chinese household income grows at 5% to 6% a year, it would put China in the right direction.

As for the rest of the world, there's no reason to panic over China's economic slowdown. Contrary to popular beliefs, China is not the global engine of growth; it is merely the largest arithmetic component of global growth. What drives global growth is demand. China, with a large trade surplus, is not a net provider of demand to the world.

What matters to the world, in other words, is not how fast China grows but rather, how its trade with foreign partners evolves. If China rebalances in an orderly way, its imports of manufactured goods and services should rise faster than its exports. This will be good for the world.

What's more, manufacturing industries around the world that lost out to China in the export business will benefit. When wages rise for Chinese workers -- so that they have more money to buy goods and services at home -- it means other developing countries will have a chance to compete for exports if they offer lower labor wages.

There is no doubt that Beijing has a long road ahead in terms of managing a huge economy, but as of now there should be nothing surprising or unexpected about the slowing growth of China. It will probably benefit the Chinese people and the global economy.