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How serious is the situation of China's economy?
China’s economy has had few bad years, but never a recession and, despite the Great Leap and the Cultural Revolution Mao kept it growing at 7.2% annually for 24 years, twice as fast as America.
But lazy journalists, who tend to look for negative news (and not just about China), have been predicting a Chinese economic disaster for so long that we think China’s economic situation is serious. Here’s a small sample of what we’ve been told over the past 25 years:
Another reason we might think China’s situation is serious is because journalists and lazy economists confuse the acceleration rate of China's economy with its growth. They are different things.
6.5% is a ratio expressing the rate of acceleration, not growth. Knowing a ratio, like 6.5%, tells you nothing about growth unless you know what to multiply it with. Growth is a value derived by multiplying the rate of acceleration with the previous year's GDP and is expressed in RMB or $. Growth $ = Annual GDP $ x Rate of acceleration.
In 2006, China’s economy was $7.6 trillion. Growing at 12%, it added $761 billion that year. Therefore, growth = $761 billion. [7.6 x 1.12B]
In 2016, China’s economy was $21.1 trillion. Growing at 6.7%, it added $1.3 trillion that year. Therefore, growth = $1.3 trillion [1.06 = $1.27T].
So China's economy is not slowing down, it is speeding up.
What about debt? We are often told that China’s indebtedness is serious but not about China’s assets. How do China’s assets compare to its debt? In other words, how easy is it for China to pay its debts? Here are two charts that give you some idea. This one shows the debt-to-GDP ratios of the world’s leading economies, data from the Bank for International Settlements, Basle:
Next, what are China’s assets compared to GDP? Here are the most recent figures I could find:
We are told that all debt (all Chinese debt?) is bad, but this is nonsense. The entire world’s economy runs on debt. U.S. Treasury Bonds are pure debt. Even currency is a form of debt.
What’s not discussed is the quality of the debt: will the debt-holder be repaid? Will she receive the promised interest payments regularly for the life of the debt? Will the final value of the debt, after adjusting for inflation, make the investment worthwhile?
Happily, Chinese government debt is of high quality, partly because the Chinese government has access to the safest, most lucrative investment opportunities and can, in a sense, guarantee them because it owns the underlying assets. When it builds a new high speed rail line, for example, it owns the land around the new railway stops and can develop the land very profitably. The cash flow from that development then goes to paying off the debt–usually in 15 years. The St Louis Federal Reserve was curious and published a draft report, Is Government Spending a Free Lunch? Evidence from China
, saying that Chinese government investments yields a Keynesian multiplier of between two and three (compared to America’s 0.9.), so there’s room for more profitable investment.
Another factor that China alarmists overlook is growth. Here’s what Nobel Economist Robert Fogel predicted in 2010 for China’s economic growth through 2040 (so far, it’s on track):
If you know your wages will double in the next ten years, you can afford a bigger mortgage or higher car payments because you’ll have more money to repay the debt. China’s economy has doubled every ten years for the past 40 years and, at that rate, it will be easier for China to repay its debts than for any country on earth. And wages have doubled every ten years for as long as anyone can remember:
Finally, to whom is the debt owed?
China owes 90% of its debt to China and 90% of that debt is owed by one department of the Chinese Government to…another department of the Chinese Government so, if debt repayments become burdensome, China can chill.
The situation in China’s economy is seriously good.
China’s economy has had few bad years, but never a recession and, despite the Great Leap and the Cultural Revolution Mao kept it growing at 7.2% annually for 24 years, twice as fast as America.
But lazy journalists, who tend to look for negative news (and not just about China), have been predicting a Chinese economic disaster for so long that we think China’s economic situation is serious. Here’s a small sample of what we’ve been told over the past 25 years:
- 1990. The Economist. China's economy has come to a halt.
- 1996. The Economist. China's economy will face a hard landing
- 1998. The Economist: China's economy entering a dangerous period of sluggish growth.
- 1999. Bank of Canada: Likelihood of a hard landing for the Chinese economy.
- 2000. Chicago Tribune: China currency move nails hard landing risk coffin.
- 2001. Wilbanks, Smith & Thomas: A hard landing in China.
- 2002. Westchester University: China Anxiously Seeks a Soft Economic Landing
- 2003. New York Times: Banking crisis imperils China
- 2004. The Economist: The great fall of China?
- 2005. Nouriel Roubini: The Risk of a Hard Landing in China
- 2006. International Economy: Can China Achieve a Soft Landing?
- 2007. TIME: Is China's Economy Overheating? Can China avoid a hard landing?
- 2008. Forbes: Hard Landing In China?
- 2009. Fortune: China's hard landing. China must find a way to recover.
- 2010: Nouriel Roubini: Hard landing coming in China.
- 2011: Business Insider: A Chinese Hard Landing May Be Closer Than You Think
- 2012: American Interest: Dismal Economic News from China: A Hard Landing
- 2013: Zero Hedge: A Hard Landing In China
- 2014. CNBC: A hard landing in China.
- 2015. Forbes: Congratulations, You Got Yourself A Chinese Hard Landing.
- 2016. The Economist: Hard landing looms for China
- 2017. National Interest: Is China's Economy Going To Crash?
Another reason we might think China’s situation is serious is because journalists and lazy economists confuse the acceleration rate of China's economy with its growth. They are different things.
6.5% is a ratio expressing the rate of acceleration, not growth. Knowing a ratio, like 6.5%, tells you nothing about growth unless you know what to multiply it with. Growth is a value derived by multiplying the rate of acceleration with the previous year's GDP and is expressed in RMB or $. Growth $ = Annual GDP $ x Rate of acceleration.
In 2006, China’s economy was $7.6 trillion. Growing at 12%, it added $761 billion that year. Therefore, growth = $761 billion. [7.6 x 1.12B]
In 2016, China’s economy was $21.1 trillion. Growing at 6.7%, it added $1.3 trillion that year. Therefore, growth = $1.3 trillion [1.06 = $1.27T].
So China's economy is not slowing down, it is speeding up.
What about debt? We are often told that China’s indebtedness is serious but not about China’s assets. How do China’s assets compare to its debt? In other words, how easy is it for China to pay its debts? Here are two charts that give you some idea. This one shows the debt-to-GDP ratios of the world’s leading economies, data from the Bank for International Settlements, Basle:
Next, what are China’s assets compared to GDP? Here are the most recent figures I could find:
We are told that all debt (all Chinese debt?) is bad, but this is nonsense. The entire world’s economy runs on debt. U.S. Treasury Bonds are pure debt. Even currency is a form of debt.
What’s not discussed is the quality of the debt: will the debt-holder be repaid? Will she receive the promised interest payments regularly for the life of the debt? Will the final value of the debt, after adjusting for inflation, make the investment worthwhile?
Happily, Chinese government debt is of high quality, partly because the Chinese government has access to the safest, most lucrative investment opportunities and can, in a sense, guarantee them because it owns the underlying assets. When it builds a new high speed rail line, for example, it owns the land around the new railway stops and can develop the land very profitably. The cash flow from that development then goes to paying off the debt–usually in 15 years. The St Louis Federal Reserve was curious and published a draft report, Is Government Spending a Free Lunch? Evidence from China
, saying that Chinese government investments yields a Keynesian multiplier of between two and three (compared to America’s 0.9.), so there’s room for more profitable investment.
Another factor that China alarmists overlook is growth. Here’s what Nobel Economist Robert Fogel predicted in 2010 for China’s economic growth through 2040 (so far, it’s on track):
If you know your wages will double in the next ten years, you can afford a bigger mortgage or higher car payments because you’ll have more money to repay the debt. China’s economy has doubled every ten years for the past 40 years and, at that rate, it will be easier for China to repay its debts than for any country on earth. And wages have doubled every ten years for as long as anyone can remember:
Finally, to whom is the debt owed?
China owes 90% of its debt to China and 90% of that debt is owed by one department of the Chinese Government to…another department of the Chinese Government so, if debt repayments become burdensome, China can chill.
The situation in China’s economy is seriously good.
) to argue here. Move on buddy.
