Why obsessing over GDP is no longer in China’s best interests

[AndrewJin]

Is the world's fastest growing democracy full of illiterates? I hope he is just a false flagger deliberately defaming this democracy, otherwise a country full of such people is hopeless.

 

[SBUS-CXK]

Your answer lies in below articles..
http://www.forbes.com/sites/douglasbulloch/2016/04/26/why-chinas-debt-matters/#7d13b21bf88c

China's Certain Debt And Why It Matters


Since the great economic crisis in 2008, debt has taken centre stage. In the West, debt shaped the still ongoing debate between 'austerity' and 'stimulus,' the difference turning on how much overall debt an economy can sustain. It was, and still is,argued that beyond a certain level, debt has an increasingly negative impact on growth, meaning that an economy risks a doom loop where growth cannot keep up with the accumulating debt servicing costs.

Before 2008 it was common to speak only of government debt as a percentage of GDP on the assumption that the private sector was its own concern. But the banking crisis, and the wave of bailouts that followed shattered this complacency as the 'too big to fail' problem meant just that, leaving governments on the hook for liabilities originating in the private sector.

The UK economy was exemplary in this respect. Government debt to GDP ratio was just 43.5% before the crisis, regarded as well within acceptable limits. Focussing only on government debt however, as opposed to overall debt, contributed to the hubristic mood that famously inspired the former Chancellor of the Exchequer Gordon Brown to herald the end of 'boom and bust.' When the bust came, and long lines formed outside a regional bank called Northern Rock, the government was obliged to step in as underwriter of last resort. Now, of course, government debt to GDP is more than double what it was.

FILE - In this Feb. 16, 2016 file photo, a woman speaks on her phone near a display highlighting the new Chinese bank notes at a bank in Beijing, China. The Chinese economy is littered with companies that can’t pay their bills and survive only with financial help from the government. These companies and their debts pose another threat to an economy squeezed by five years of slowing growth, a free-fall in its currency and a stock market that’s sunk 20 percent this year.(AP Photo/Ng Han Guan)


greater increase than any other G7 country by some margin. For this reason, the UK's decision to adopt 'austerity' was an attempt to avoid the doom loop.

China's response to the economic crisis was radically different to the UK's. As growth turned down they opened the spigots on credit fuelled growth, boosting headline growth rates and keeping the whole world afloat at a time when there was not much good economic news to go around. China's government debt to GDP ratio was about 41% when the crisis struck and they became the standard bearer for those economists favouring 'stimulus', not 'austerity,' in search of growth. Today the Chinese government continues to refer to its relatively low government debt to GDP ratio - of around 60% - particularly when considering further stimulus, another round of which is underway.


The total debt picture, however, is rather more disturbing. Forecasters have for some time been estimating China's overall debt burden, but given the reliability of Chinese statistics, this is not easy. The Financial Times recently estimated China's debt at 249% of GDP, which is more than the UK's overall debt position (245% at September 2015). There are other guesses for China, but they tend to be larger, not smaller, and the reason this matters is that this level of debt is worse only in countries with acknowledged and serious problems, Italy, Greece, and - notably - Japan, notwithstanding that the overall Eurozone figure is comparable.

Looking at debt in the wider context, a McKinsey report - in February 2015 - estimated that global debt had risen by $57 trillion between the years 2007 and 2014. Fully $21 trillion of which can be accounted for by China quadrupling their overall debt. The largest share of China's debt is so-called 'corporate' debt i.e. soft loans to SOEs from government owned banks, which rather suggests that focussing just on the government debt to GDP ratio is just plain misleading to begin with as SOEs and state owned banks can't really be considered entirely distinct from the government. But the most important insights are twofold. First of all, China's debt position is now much worse than other developing economies - which average at around 175% - and secondly that it brings the spotlight back onto that perennial solution to all economic problems; growth.

The UK economy, through pursuing austerity, after an expected initial downturn ended up achieving higher growth rates than forecast - and higher than the rest of the G7 - by about 2013. This perceived success was eventually thought to have helped the governing party to achieve reelection in 2015 even though the UK economy was, and remains, by no means out of the woods yet. Certainly overall levels of debt remain a problem and a drag on overall economic performance. China, on the other hand has had to adjust growth expectations downwards, and is now confronting the headwinds of market doubts, capital flight, and outright warnings from the IMF about their overall debt position, which just keeps getting worse all the time.

One remaining advantage China has is that its official growth rate remains comparatively robust. But the FT analysis also shows thatdebt growth has outstripped economic growth consistently and significantly since the 2009 stimulus programme was launched. Add to this increasing doubts about the accuracy of China's reported growth rates, and what's left is a high-wire act.

If economists who argue for austerity are right, and the UK economy provides at least some evidence for that, then they may also be right that negative debt dynamics can eventually metastasise into a doom loop of rising debt and falling growth. While China was widely praised for its prompt stimulus efforts in the wake of the 2008 economic crisis, it is becoming clearer that the bill for that welcome expansion has yet to be paid. Given China's debt load at the time, stimulus was justifiable, but with China overtaking the UK in debt league tables, it is now much harder to argue that is still - or indeed ever was - the case.

@The Accountant ..
https://thewire.in/88239/china-economic-mirace-debt/

The Other Side of the Chinese Economic Miracle

David Graeber, an economic anthropologist, in his book Debt: The First 5000 years says, “One has to pay for one’s debts”. But there is one taboo of economics that the government is hiding from the public, Graeber argues – the fact that if the government balances its books, it becomes impossible for the private sector to do the same. This inevitable debt, he claims, often lands on those least able to repay it in a society.

Graeber’s fascinating historical account explains how the creation of debt remains vitally linked with the demand and creation of money (from barter to paper in all its forms). To understand debt, one needs to understand the history and creation of different mediums of exchange within the economy as an important tool to explain how swelling levels of debt emerge. Perhaps China, with its recent history of accumulating a ‘great wall’ of debt, may learn a lesson or two from Graeber’s own work.

Since 2000, China’s debt in terms of debt to GDP ratio has grown up to 280-290% (approximately), which exceeds the debt levels of highly-indebted developed countries, including the US (269%) and Germany (258%), and emerging countries like Brazil (160%) and India (135%). Over the last three decades, under China’s infrastructure-led public investment boom, the total aggregate debt has grown from $2.1 trillion to $28.2 trillion, which is greater than the combined GDP of the US, Germany and Japan over the same period.

While mainstream macroeconomics literature tends to largely focus on the government proportion of total debt, it is also important to note that other constituents like corporate debt, financial debt and household debt (in the Chinese context) tend to matter more in gauging a country’s overall indebtedness. In the Chinese case, government debt (marked at 55% of the GDP) remains low as compared to the other three constituents. Corporate debt and financial debt levels are marked at 125% and 65% of China’s GDP. But which economic factor has elicited such a vast volume of debt in China?

In a recent analysis on China’s public infrastructure-led investment model by some Oxford-based economists, it is shown how lower-quality, high cost ridden public infrastructure investments across China triggered a massive volume of overall debt, bringing the Chinese economy to the cliff of a national debt crisis.

On observing the investment and debt figures closely, one finds that the growth in China’s absolute debt is almost in equal proportion with the total capital investment; which between 2000 and 2014 was cumulatively $29.1 trillion. Scholars Steven Barnett and Ray Brooks support this further through their study, highlighting that the majority of investments China has made since 2000 remain debt-fuelled.

China’s Gross Fixed Capital Formation (blue bars) vs China’s government debt-GDP level (dotted line). Source: Trading Economics Database

China’s growing debt pile (debt-to-GDP, %). Source: McKinsey

The biggest increase in the accumulation of debt came in from the corporate and financial sector (dominated by the big four state-owned banks in China). Most of these companies (including the non-state owned private enterprises) borrowed extensively from financial markets to finance large scale infrastructure projects.

The infrastructure investment-led bubble

The traditional wisdom in macroeconomics on the utility of infrastructure investment, in recent times is built from studies by Paul Krugman (1991), David Aschauer (1989,1993) who provided econometric evidence for the case of large-scale infrastructure projects (such as rail, roadways) that in lowering transport costs led to increasing returns (i.e. through greater output, more private investment, employment growth).

While the econometric evidence cited in these studies does present a strong policy case in pushing for greater large-scale public infrastructure investment, in the Chinese case there is scant bottom-up evidence in this regard. The actual outcomes of specific investment projects present massive costs incurred in the building process of these mega projects, particularly in emerging economies like China.

The study by Ansar, Flyvbjerg, Buzier and Lunn reports results on “95 road and rail transport infrastructure projects built in China from 1984 to 2008 and comparative results with a dataset of 806 transport projects built in ‘rich democracies’”. The economic value of a given infrastructural project is tested by the benefits to cost ratio level (BCR) which needs to be either equal to or greater than one (BCR > 1.0).

Average Schedule Overrun of Chinese Projects (in %). Source: Study by Ansar, Flyvbjerg, Buzier, Lunn

In their results, 75% of the 95 transport projects in China suffer a cost overrun (in local currency terms), while the actual costs incurred on these projects remain 30.6% higher than the original, estimated cost.

The figure above helps in giving an approximate idea on the average schedule overrun (in %). As projected by the analysts, the actual average construction time taken to complete infrastructure projects (4.3 years) remained less than the average time used by the richer democracies (6.9 years). At the same time, there aren’t any schedule overruns (only one in every two projects encountered a schedule delay in China, compared to seven out of ten in richer democracies). The problem, however, remained with the costs incurred and the quality and safety attached with actual outcomes delivered in the infrastructure projects completed.

In building infrastructure at an impressive speed, the Chinese corporate enterprises (state and non-state owned), financial markets traded off with quality, safety and the estimated cost of these projects. The combined effect of benefit shortfalls and cost overruns pushed the BMR below one.

While conventional macroeconomic theory may typically treat all infrastructure as part of an exogenous cost-reducing technological input into the economy, to drive growth, it is increasingly becoming evident that most models arguing for such investment, intuitively assume that more and better infrastructure reduces the cost of transporting goods and services.

The evidence cited from China lucidly suggests that poor project-level outcomes translate into “substantial macroeconomic risks”, like accumulating debt, higher percentage of non-performing assets, distortionary monetary expansion from central banks (involving printing of more local currency to finance high cost infrastructure investment) and so on.

Such a pattern clearly signals a warning sign for most emerging economies that seek to embark on a China-style public investment model in the quest of achieving higher economic growth. China’s case offers significant macroeconomic policy lessons where emphasis on deep institutional reforms along with the development of quality, sustainable physical infrastructure needs greater emphasis (both from the government and the private sector).

Countries like India, which are currently in process of homogenising large scale infrastructure projects across the country, need to be wary of the costs-returns attached with such projects. Robust project designing frameworks, periodic monitoring tools and better outcome-based impact assessment models are critical in the process of achieving consistent developmental growth.

Okay, okay. There's nothing worse than India.

 

[tranquilium]

On GDP target and market force:
The author says that China should let market force a decision role. China has shown one can have a perfectly running market economy with significant state presence. To a large extent, China's economic policy follow Keynesian economic theory, which works just fine. if some countries like to implement the liberalism economic model, so be it.

The thing is, market force does have a significant role in Chinese economy. As the same time, presence of SOE also have its place and the past decades have proven that for developing economies carving out its international market, SOE are much more resilient than private companies due to higher capital availability and more favorable domestic policy.

Also, private firms have proven to be terrible at making long term investment, particular ones that bring great amount of secondary benefit, but not a lot of primary returns, examples of such investment include roads, railway, power grid, fundamental research, space exploration, etc.

I do not have a detailed knowledge on Keynesian economic theory. However, preliminary reading on the concept indicated it is more built for an US-type economy where the main role of the central government is the proving policy intervention such as interest rate adjustment during a recession in the private sector. In other word, the main driving force of an economy described by Keynesian economics is still the private sector. In comparison, the biggest driving force of the Chinese economy is clearly central planned. In its current phase, Chinese focus is also primarily on infrastructure reformation with heavy emphasis on technological and infrastructure development. I could be wrong, but it doesn't appear to fit Chinese economy.

 

[GeraltofRivia]

The thing is, market force does have a significant role in Chinese economy. As the same time, presence of SOE also have its place and the past decades have proven that for developing economies carving out its international market, SOE are much more resilient than private companies due to higher capital availability and more favorable domestic policy.

Also, private firms have proven to be terrible at making long term investment, particular ones that bring great amount of secondary benefit, but not a lot of primary returns, examples of such investment include roads, railway, power grid, fundamental research, space exploration, etc.

I do not have a detailed knowledge on Keynesian economic theory. However, preliminary reading on the concept indicated it is more built for an US-type economy where the main role of the central government is the proving policy intervention such as interest rate adjustment during a recession in the private sector. In other word, the main driving force of an economy described by Keynesian economics is still the private sector. In comparison, the biggest driving force of the Chinese economy is clearly central planned. In its current phase, Chinese focus is also primarily on infrastructure reformation with heavy emphasis on technological and infrastructure development. I could be wrong, but it doesn't appear to fit Chinese economy.

Essentially Keynesian economics is a mixed capitalism economy– predominantly private sector, but with a role for government intervention. The idea is that private sector decisions lead to inefficient macroeconomic outcomes, as each private capitalist are seeking optimal outcome for himself, which require active policy responses by the government through fiscal policy actions.

We can see Keynesian model have a lot in common to China's current state capitalism model, which is probably a strong form of Keynesian economy with its massive SOE.