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The Myths About China's Economic Slowdown

Discussion in 'World Affairs' started by haidian, Aug 16, 2018.

  1. haidian

    haidian BANNED

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    The Myths About China's Economic Slowdown
    Aug 15, 2018, 09:00pm

    China’s real GDP growth peaked in 2007 at 14.2%, and has been trending downward since. By 2017, it dropped to 6.8%. That much is clear and unmistakable. The problem is how to interpret the slowdown, especially in light of some recent economic indicators that have been widely used to project where the Chinese economy is heading. Here we quickly enter into the realm of myth making.

    The first common myth is that the recent decline of the Chinese stock market, which has shed around 20% of its value since the beginning of the year, signals that the slowing economy is being affected by the trade war and therefore heading toward deeper troubles. Indeed, U.S.President Donald Trump gleefully tweeted on August 4 that the slide of Chinese equities indicates that he is winning the trade war against China.

    The fact of the matter is that, unlike the U.S., China’s stock market has few significant links with the real economy. While the issuance of stocks is the primary source of raising capital for businesses in the U.S. and Western Europe, Chinese businesses continue to rely heavily on bank lending. Up to three quarters of China’s business investment has been financed by bank loans, versus less than 20% in the U.S., according to estimates by the McKinsey Global Institute. In this regard, the stock market is peripheral in China.

    Furthermore, it is estimated that 80% of the trading volume of the Shanghai Stock Exchange is accounted for by small retail and individual traders, in contrast with institutional traders’ whopping 90% volume share in the U.S. As a consequence, volatility in America’s stock markets has a direct impact on the real economy via institutional traders and investors but not so in China. In fact, an analysis of data from 1995 to 2014 shows no correlation between GDP growth and stock market valuation in China whatsoever. So much for a softening Chinese stock market signalling victory for Trump’s trade war.

    A second myth is that slowing economic growth in China has led to the weakening of its currency, which in turn portends more difficulties ahead. Pundits who are bearish on China pen headlines using terms like “plunging Chinese yuan” and “troubled economy” in the same breath. And they keep pointing to the yuan’s 8% depreciation from April 11 to August 1 this year. The April 11 date is significant because it’s the most recent peak of the yuan’s exchange value against the U.S. dollar. That’s right, if you want to exaggerate the decline of anything, make sure you choose the last peak value as the starting point.


    The fact of the matter is that it is not just the Chinese yuan that has declined against the U.S. dollar. Let’s stay with the April 11 starting day for the moment, by August 1 the euro also declined 6.6% against the US dollar, so did the Japanese yen by 6.3%, and the Indian rupee by 7.5%. The 8% decline of the yuan is therefore unremarkable. Taking a broader and more meaningful time frame of the last one year from August 1, 2017 to August 1, 2018, the Chinese yuan declined by 1.4% against the U.S. dollar, alongside with the decline of the euro by 1.0%, the Japanese yen by 1.3% and the Indian rupee by 6.5%, according to data from Haver Analytics. Framed as such, the decline of the yuan’s exchange value against the U.S. dollar is entirely unexceptional. Putting the spotlight exclusively on the Chinese yuan creates a completely misleading diagnosis. As I argued in an earlier article, much of the decline of the major currencies against the U.S. dollar is due to the rise of U.S. dollar driven by nothing more than global economic uncertainty because of the U.S.-initiated trade war.

    Finally, there is the myth of an impending crash of the Chinese economy due to its debt overhang. China’s debt level had indeed surged in the aftermath of the global financial crisis when the government opened the spigot to flood the economy with bank lending. It helped holding up China’s economic growth, and in so doing provided much needed support to the global economy as well. However, China’s debt level also rose to among the highest in the world measured as a percentage of GDP, and has led to dire warnings of a coming financial crisis. The argument runs that, to avert a financial crisis, China has no choice but to deleverage, but in so doing the economy could crash.

    What is overlooked is the fact that virtually all China’s debt is domestic, and most of it is owed by state-owned enterprises to state-owned banks. In other words, most debts are owed by one part of the government to another. Coupled with China’s massive foreign reserves, this makes a debt crisis like that of Greece impossible. China dealt with a worse debt situation in the 1990s by removing the banks’ non-performing loans and recapitalizing the banks. In the worst case scenario, the government could do so again; and today its fiscal power is stronger than in the 1990s.

    More importantly, the emphasis on deleveraging fails to understand a fundamental function of debt in an economy. One person’s debt is another person’s investment. A high level of debt by itself is not a problem if it is productively invested. The best solution to China’s debt overhang is therefore to gradually increase productively invested debt and at the same time writing off steadily the unproductive debt. While the overall debt level may not have changed (hence no appearance of deleveraging), but as long as the composition of debt is shifting from the unproductive to the productive, the debt problem is resolved while economic growth remains intact.

    This appears to be the course that the Chinese government is taking; curbing lending to state-owned enterprises, especially those in heavy industry suffering from over capacity, while maintaining supply of credit to more productive borrowers, especially private businesses in the service sector which now accounts for over half of the GDP. Hard data are difficult to come by; but the IMF’s estimates of China’s "incremental capital output ratio" (ICOR, the lower the value, the more productive the capital invested) show a decline from 7.07 in 2016 to 5.43 in 2017. This could just be a blip in the data, or the beginning of a trend, we just don’t know. Only time will tell. For now, a debt-induced financial crisis in China is sheer fantasy.

    These are some (by no means all) of the common myths about China’s economic slowdown. What, then, is the reality of China’s economic slowdown?

    https://www.forbes.com/sites/yuwahe...-about-chinas-economic-slowdown/#2f3f3dca5d55
     
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  2. haidian

    haidian BANNED

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    Debt owned by China is like taking money out of one pocket to put into another. When you have two bank accounts, transfering money from one of your account to another won't bankrupt you. Economists around the world have long pointed out that China's debts are also China's assets.
     
    Last edited: Aug 16, 2018
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  3. 52051

    52051 FULL MEMBER

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    What the west retarded "experts" fail to get is: China has the world largest industrial base, and can produce anything and everything, and can simply put unlimited amounts of goods if needed.

    Which means: debt means nothing in China, just in case, China can print infinite amount of paper money to write off all debts yet maintain inflation under-control thanks to China's enoumus industrial base.

    This is an unique character of today's China economy and thats why debt means nothing in China, China can afford far greater degree of debt comparing to ponzi scheme economoy cesspools.

    And by doing so it will actually acceralating China's GDP growth, thats the trick for China's economy and Xi-Li have not even tried this in their arsenal, another world economy crisis will make China do that trick again and you will see a far stronger China after the world meltdown, just like the last time.

    What the west simply dont get is there is no comparison between their tin-can ponzi scheme economy and a robust superpower economy China get.
     
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  4. TaiShang

    TaiShang ELITE MEMBER

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    So far China has been soft-handling the economic war. Crucial assets have not been mobilized or drastic policies have not been initiated.

    I guess China is also using the economic war as a real-time test of the country's economic fundamentals and fixing the issues that were unknown before.

    China is masterful in turning what appears to be negative into positive.
     
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  5. Mista

    Mista SENIOR MEMBER

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    ...?

    It doesn't work that way. By the way GDP measures goods and services, not just goods. The service sector accounts for more than half of China's GDP, and the percentage will continue to grow in the future as China reforms her economy.

    In any economy, the money supply will be chasing after a limited amount of goods and services. When the growth in money supply outpaces real GDP (goods and services) growth, definitely there will be inflation. It's basic macroeconomics 101.

    What matters is which area of the economy will bear the excess amount of inflation. In China it's the property market which absorbs the excessive liquidity, and that is why property prices in many Chinese cities are soaring above the official inflation rate.

    And property prices are excluded in the calculation of CPI (consumer price index) in every country. That's because property is considered as an asset, not a good to be consumed. Therefore what's factored in CPI is instead rental prices which can be consumed. Rental prices are fairly moderate in China, and therefore China's CPI is quite stable.

    It's quite bizarre though, because a spike in property prices will usually lead to a spike in rental prices but that didn't happen in China. I think that's because Chinese culture emphasis on home ownership and generally shun renting. It's actually more worth it to rent rather than to purchase a property though, especially when China's residential land has 70-year leasehold.
     
  6. 52051

    52051 FULL MEMBER

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    Do you even read what I have write, I have already pointed out that it is means keep inflation under-control, it doesnt mean it will not create inflation.

    And since inflation and wealth-creation all have its counter- effect, thats why once you print more money to create more demand, it will result in more supply just in case of China, thanks to our unique superpower maunfacturing capability, and in the end, it will even acceralting the growth of wealth (GDP) while maintain the inflation under-control.

    Unlike the case of the cesspool economy like yours, if you try that trick, since most of your goods are imported, that will result in out-of-control inflation.

    As for property investment, China have already stated that after 70-year is ended, the owner will only need to pay a very small amount of money to renew the contact if they wanted.

    And btw, in China, the governemnt can pay millions of dollar to you even for the house you rented not owned, so you should not worry about average Chinese's investment proprity, afterall most of them are smarter than you so they must get very reasonable reasons to invest in property, thats why most of the earlier investors now own several million dollar's wealth already, and as a poor boy, you dont need to worry about them, just keep the worry to yourself's life:lol:
     
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  7. Mista

    Mista SENIOR MEMBER

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    Wealth and GDP are 2 different concepts.

    So if the world combines our manufacturing capabilities, we can print our way to prosperity? :lol:
     
  8. 52051

    52051 FULL MEMBER

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    GDP and wealth generation are highly correlated concepts, dont waste my time on playing with words since I know the bestest english words.:rofl:

    Again, stop waste my time, everything can do to an extend, what basically I told you is, the healthy degree of debt to GDP in a superpower economy of China is far far greater than it to a cesspool tin-can economy like yours:lol:
     
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  9. Mista

    Mista SENIOR MEMBER

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    Sure. :lol:

    But didn't you just say that China can print an infinite amount of money?