China, the Miracle Economy

Man’s hope!

Yes, it’s the ‘miracle economy.’ China, that is. Many analysts think it has ‘decoupled’ from the rest of the world economy. While the rest of the world sinks into the ‘worst recession since the ’30s,’ it is said to be growing at 8% per year.

Go figure.

Well…when we go figure we figure there’s something fishy about it. In fact, we figure it’s a fraud.

In America, the bear market bounce took a little jig downwards yesterday. Stocks – measured by the Dow – fell 96 points. Oil fell below $70. The dollar and gold remained almost unchanged.

But China’s revved up so hot she seems likely to throw a rod. We’ve been telling our Dear Readers to stand clear.

At least, that’s the case with the Chinese stock market. It’s a bubble. And it’s getting ready to pop.

As for the economy…we figure it’s a fraud…

Chinese officials have a funny way of counting. When products are shipped from the factory, for example, they are counted as ‘sales’ even though no one may actually buy them.

There are some other ways of keeping score that tend to tilt the game in China’s favor – at least, on paper. When you add up all the scores – it shows China a big winner. But by the end of the day, it isn’t at all clear that China’s economy is growing at such a breakneck speed. In fact, it isn’t clear that China is really growing at all – not in a genuine and helpful way.

And here…perhaps we should pause. We are about to tell you that China is a scam. It’s not really becoming more prosperous. But before we do, we have to explain what prosperity really is.

Do you remember the Bubble Years? Of course you do. They just ended scarcely 24 months ago. Well, during those years we were told that we were getting richer. Two forms of evidence were presented – one statistical…the other observational. The numbers told us that GDP was growing. Since economists figure GDP growth is the same as prosperity…they thought Americans were getting richer.

There was also the evidence available to anyone with eyes. You could look at any driveway; there you would find two or three cars – new cars…big cars. And behind them was a brand new McMansion…Bubble Era vintage…

Yet, both forms of evidence were misleading. Americans were spending. The spending showed up as GDP growth. The faster they spent, the more new cars and new houses they had too.

But they were not creating wealth…they were consuming it. They were spending money they hadn’t even earned yet. In other words, they were not only consuming their current wealth, they were consuming wealth that didn’t even exist yet – it was tomorrow’s wealth. You couldn’t see this happening by looking at the GDP numbers; instead you had to look at balance sheets. And even then, you needed to look at them with a suspicious eye. On the one side, debt was clearly swelling up; it doubled during the 2001-2007 period. On the other, assets were swelling up too. But the assets were of the overpriced, Bubble Era variety…houses and stocks that were subject to easy correction. And when the correction came, assets declined…and debt grew heavier and heavier. Now, Americans have twice as much debt…and their assets are back to where they were 10 years before. Net result: impoverishment, not wealth.

Consuming wealth is not the way to get rich. It’s the way to get poor. But it would take someone without a PhD in economics to see such a simple and obvious truth. Given a fellow a computer and an advanced degree in economics and he’s ready to believe anything…

Yes, dear reader, in His majestic wisdom, God – or whatever wiseacre created this system – set up something so subtle and complex that it is beyond the reach of human tinkering. That’s why the meddlers always make things worse. That’s how they put the ‘great’ into the depression of the ’30s – by interfering with the markets’ natural corrective mechanisms. And now these simpletons think they can stop the correction underway since ’07 – with stimulus, bailouts, and boondoggles. Yes, they admit, it was excess credit that put American consumers into such a jamb. But, heck, now we’ll let the government do the borrowing. The government will make up for the demand that has been removed from the private sector. The private sector is paying down debt at roughly $1 trillion per year. And now the public sector is adding debt at roughly $1 trillion per year. That ought to do it, right?

Ha…ha…yes…why not? And while we’re at it, let’s round off pi to a whole number so it will be easier for school kids to remember.

But wait a minute…we’re talking about China, not the United States. And we’re talking about Chinese meddlers, not the American variety. And we’re talking about the Chinese depression…not the depression in the advanced economies.

But wait…you’re probably wondering… ‘What Chinese depression? China is booming…isn’t it?’

Well, here’s a question for you: if China were really growing at 8% per year, how come its electricity consumption is going down?

Answer: Because the Chinese bureaucrats can jiggle and jive the numbers for employment, GDP, and inflation. But the number of kilowatt-hours consumed in China is just a number. It is not computed. It is not seasonally adjusted. It is not tortured by statisticians nor tormented by economists. It is just a number. And that number is a smaller number than it used to be.

Oh, and here’s another number. China’s exports for July were down 22% from the year before. Here’s another question: how can an export led economy grow when its exports are collapsing?

Again, we have an answer: when it is not really growing.

According to the meddlers, China is growing because meddling works. China is spending $586 billion (proportionally nearly 3 times as much as the US) to keep its economy booming. The program must be working, say the economists, because China’s economy is still growing.

But is it? Most of the money is spent on infrastructure. The Chinese are doing what the Japanese did before them. Japan bailed out its banks and spent trillions on infrastructure. There were years when little Japan was pouring much more cement than the entire USA. – channeling rivers, building bridges to nowhere, and creating highways for no one. What did they get for their money? Well, you could say they got a lot of infrastructure…and the most cemented-up country on the planet. Is that a good thing? We don’t know. But one thing they didn’t get was durable economic growth.

Why not? The easy answer is because an economic system is too sophisticated to yield to these ham fisted interveners. Another way to look at it is because the economy had already spent too much…creating too much capacity. Adding infrastructure that could handle more capacity was not a solution.

“Keep in mind,” says The Richebächer Letter’s Rob Parenteau, “China needs at least 9% growth to soak up the 24 million new Chinese workers who come of age each year – something even the Chinese Premier doesn’t like to mention.”

But heck…it’s summer. And in the sum…sum…summertime, we’re not going to criticize our fellow man. Instead, we’re just going to laugh at him.

In China, for example, the government’s stimulatory programs are having the same flaccid results they got in Japan. Prices are going down. The Chinese feds are trying to get people to spend more money – just as they did in Japan. But people do not spend more when prices are falling. They wait for a better deal. And as they wait, consumer demand falls…forcing prices down further. Japan has gone through almost two decades of on-again, off-again consumer price deflation. Now it’s China’s turn. Consumer prices in China have been going down for the last six months…and are now reported falling at a 1.8% annual rate.

How could prices be going down in a booming economy? Well, because the economy isn’t booming. Instead, it’s burdened with overcapacity – just like Japan’s. And like Japan’s it is probably doomed to go through a long period of re-adjustment…before a durable recovery can begin.

Until tomorrow,

Bill Bonner
for Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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5 Comments on "China, the Miracle Economy"

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Sitting in a very subdued office in Beijing after a weekend looking around near empty shopping malls and markets with increasingly desperate traders, I was also wondering how this economic miracle was working. Fewer jobs are being advertised here, rental prices are dropping (but property asking prices are going up???), food prices are stable, expats have been leaving in droves, those that are left talk about how dead it is at work, the bars are not empty but hardly packed either. I realise these are only superficial observations but I have been trying to reconcile the growth figures of China… Read more »

Great article Bill

I am also very skeptical of these strange tales of growth.

Maybe during the olympics…but those are long gone.

South Korean
The author had taken a simple mistake. Exports itself dosen’t affect GDP figure. Net Exports does. Even though the exports decreases, Net exports could go up when Imports decreases more, and whole GDP could also increases. Many experts foresee that china would replace German as the first place in exports. As the author said, if china is an economy which is led by exports, what is the clearer evidence of the chinese growth story? Of course, chinese economic statistics are somewhat mistrustful. But not so much. Some western scholars looked down on the growth of the NICS, and said that… Read more »
Greg Atkinson
South Korean, DR simply do not have much of a handle on Asia in general. Whenever they write anything about Japan for example it is pretty inaccurate, simplistic and based on some tired old clichés. (bridges to nowhere, government spending in the 90’s was wasteful etc) Bill fails to mention that deflation can be driven by a highly competitive environment, falling energy prices or cheap imports. The fact is that lowers oil prices are pushing many economies near deflation. In any case people do not generally delay purchases simply because deflation is present as they simply do not know if… Read more »
First Home Buyer

Reminds me of a Woody Allen quote:

“If you want to make God laugh, tell him about your plans.”

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