Sunday, August 23, 2015


Many claim workers for the National Bureau of Statistics of China (NBSC), the statistical agency of the National People's Congress of China fudge the GDP numbers for China. Their belief is so pervasive that articles about whether these workers fudge numbers or not has become regular journalism fodder. Chinese premier Li Keqiang fueled the fudged data beliefs of many when he said GDP data is "man-made and, therefore unreliable".

Back on July 15, 2015, the published Whether to Believe China's GDP Figures. The writer of that work claims workers for the NBSC smooth the data rather than fabricate it. As well, the writer points readers to a work published by Quartz whose writer, Gwynn Guilford, mocks the latest NBSC GDP data, calling it a "charade."

Back on March 25, 2013, three workers of the Federal Reserve Bank — John Fernald, Israel Malkin, and Mark Spiegel — stated, "...reported Chinese output data are systematically related to alternative indicators of Chinese economic activity. These include alternative indicator indexes of Chinese activity composed of variables that are less susceptible to official manipulation, as well as externally reported trade volume measures. Importantly, these models suggest that Chinese growth has been in the ballpark of what official data have reported. We find no evidence that recently reported Chinese GDP figures are less reliable than usual." In short, Fernald and friends claim there isn't any unusual fudging of data by Chinese statisticians.

The Conversation published a work by an economics professor, Carsten Holz. In the work, Holz quoted a former NBSC official who said, “the government statistics organisation primarily serves the needs of macroeconomic decision-making of Party and government leaders at each administrative level, and is responsible to the Party and government leaders at each administrative level.” That said, Holz himself wrote, "Double-checks more often than not confirm the plausibility of the official data. In other words, if we make a reasonable comparison between the figures for real growth in GDP components against the actual volume of physical output, then those official real GDP growth rates look rather good."

In China GDP: Believe It or Not?, Leslie Shaffer of CNBC quoted a few men regarding their views on the veracity of second quarter 2015 data. Some take the data as truth, some do not. Still others say it doesn't matter because the Chinese economy is growing. A few of the guys might have it right, Adam Myers, senior market strategist at Credit Agricole; Ewen Cameron Watt, chief investment strategist at Blackrock Investment Institute; Brian Jackson, China economist at IHS Global Insight; and Patrick Chovanec, chief strategist at Silvercrest Asset Management.

Myers said, "You only have to look at commodity prices to see that there's a disconnect with what the official Chinese data is showing and what really the demand in the underlying economy is having for things like raw materials. We've been talking about that for months and still the Chinese data remains relatively solid, but all the underlying anecdotal evidence points to a much deeper slowdown in China. Put on top of that the wealth and credit effects that we've seen through the Chinese stock markets in the last couple weeks, a much larger deterioration appears to be on the cards than the official data would indicate."

Watt said, "If you really want to get the measure of what people think about China, go look at commodity prices, go look at the Aussie dollar, go look at employment in Australia. It's telling me the economy is slowing down," he said. "There's a huge oversupply because of the assumption the fixed investment boom is going to last forever."

Taking the GDP data as truth from the National Bureau of Statistics of China and expressing that data in True Dollars™, the Chinese economy shrank -1.0% from the second quarter of 2015. Already, the Chinese economy had shrunk 3.16% in the first quarter of 2015. Year-to-quarter, the Chinese economy has shrunk 4.1%.

And while the Chinese economy has grown 9.1% over the last five years, the Chinese economy has shrunk -5.4% since hitting peak GDP at the end of Q3 2013. So, it's likely a safe call to say the Chinese economy is in recession. It remains to be seen if the recession runs into a depression.

Looking at the graph above, the Q3 2008 dip into Q1 2009 should surprise no one as that came during the US and European Banking Crisis. The Chinese economy shrank -7.7% during that period.

Since Q2 2011, Chinese economy has fallen -2.79%. This should surprise no one. And if all gave earnest thought to the above, they would come to see that it makes sense.

Exports account for a bit more than one-fifth of Chinese GDP (22%). If economies of Chinese importers are slowing, how can the Chinese economy not also slow? 47.8% of Chinese exports go to these countries: USA (19%), Japan (8.3%), Germany (4.4%), UK (2.5%), Mexico (2.4%), France (2.3%), Russia (2.3%), Canada (2.3%), Australia (2.0%), Nederlands (2.0%). Poorer Americans and poorer Europeans can't buy Chinese goods even at low, Chinese prices.

Back on July 8, 2015, Michael Auslin writing for the New York Post claimed the China economic miracle is over. Auslin pointed to the 30% plunge in stock prices between May and July, 2015, after a 140% run up between July 2014 to July 2015, a plunge that wiped out $3 trillion from stocks as "more evidence that China’s high-flying days are over." In his work, Auslin mentioned Derek Scissors, a resident scholar at the American Enterprise Institute (AEI) who focuses on the Chinese and Indian economies. According to Auslin, Scissors supports the belief that economic growth in China has essentially stopped.

In a work by Scissors published by the Financial Times on August 21, 2015, Scissors stated, "China’s economy began weakening no later than 2008, and probably before. A temporary upswing starting in late 2009 and continuing into 2010 was due to an unsustainable, unwise, and unprecedented explosion in debt. From 2011 on, ups and downs in the global economy have not been due to ups and downs in China – the trend in Chinese performance has been invariably down." As you can see in my graph above, Scissors hunch is right. Scissors has another worthy read, China’s Stall, published on June 17, 2015, by the American Enterprise Institute.

On August 16, 2015, Foreign Affairs published China Hits the Wall by Salvatore Babones. Babones stated that, "[t]hree and a half decades of easy profits from one-way bets on China's reintegration with the outside world have come to an end."

Babones believes a crisis is coming to the Chinese, a crisis driven by administrators at all levels of the Chinese government failing to meet their financial obligations owing to demographic stagnation, capital flight, and the decision in 2013 to give the market a decisive role in Chinese economic development.

In the work, Babones suggested that China escaped the 2008 U.S. And European Commercial Banking Crisis even though the Chinese suffered a 16% decline in exports year-over-year 2009 to 2008. To offset that decline, Babones stated that executives for Chinese law givers spent $586 billion on airports, subways, and high-speed rail.

Way back on October 21, 2014, The New Yorker published Is the Chinese Economy About to Fall Off a Cliff, a work by John Cassidy. Cassidy cited a Conference Board work by David Hoffman and Andrew Polk in which Hoffman and Polk wrote, “Private sector debt, now at almost 200% of GDP and up from 117% at the end of 2009, is still accruing at 15 percentage points per year...[debt is]  well in excess of the thresholds that have historically triggered financial crises in other countries.”

The other day, Carlo Cottarelli, an executive director of IMF, went on record and said, "Monetary policies have been very expansive in recent years and an adjustment is necessary...It's totally premature to speak of a crisis in China." In so many words, Cottarelli has said that too much credit has been given.

Here is what I teach about any crisis and panic. A crisis arrives when too much property of futurity has been created and not enough profit arises from sales of property happening in the now. When true prices fall, margins get squeezed on extant capital. When enough dominoes of failing topple, all get pushed to panic.

A crisis begins with a sudden realization of epic loss. It's the movement of mind from uncertainty (50-50) to certainty (100%) and 100% probability of loss on a wide scale. A crisis begins when all those who have undertaken too much credit for trade find themselves lacking income from extant capital structure sufficient to service debt. All too often, they have overpaid for their capital structure.

Every crisis has the panic part. Panic is the scramble for the exits. Panic is the rush to exit credit positions. Crisis is the storm. Panic is the scuttling during the storm.

There has yet to be an economy derived from bank credit, especially one with bank credit as legal tender whose people haven't found themselves with too much credit relative to forthcoming expected profits. When the Chinese create too much property of futurity (credit) relative to property traded at profit in the now, the Chinese will experience crisis. This downturn in the Chinese economy could be the turning point when the Chinese find out they have paid too much for too many factories from which they cannot earn profits.

Clearly, the Chinese needed to embrace banking credit capitalism to lift 600 millions from bare subsistence poverty because Mao communism could not do it. Mao communism previously starved to death their ancestors.

Unfortunately, the Chinese Communist Party leaders likely won't let market forces remedy the excessive creation of property of futurity. Likely, the Chinese will pull a George Bush who said infamously (watch on YouTube), "I've abandoned free market principles to save the free market system."

The recent sodium cyanide industrial explosion accident in Tianjin that leveled blocks, blowing up thousands of new cars awaiting delivery and sadly killing over 100 might turn out to be symbolic of the blow up that could be happening in the Chinese economy.

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