What if China’s GDP is Seriously Overstated?

Michael Pettis has released one of his carefully reasoned posts, this one on the dark art of guesstimating what China’s GDP really is, given the notorious unreliability of its official data.

The strength of Pettis’ approach sometimes works to his advantage. He does a great job in breaking down his arguments to clear, easy to understand, step-by-step reasoning. That tends to make his posts pretty long. In this case, that meant that the part I though was most provocative came towards the end, when impatient readers might have figured they had gotten the drift of his gist and moved on.

In this one, he starts with the last GDP release, and in particular, the implications the fact that its alarmingly high investment rate continues to increase at a stunning clip. But he then turns to the rather tiresome debate as to when China’s economy will overtake that of the US, and that the GDP figures touted now could well be overstated by a considerable degree:

What if China’s GDP numbers seriously overstate the true value of China’s economy?

There are at least two very good reasons to believe that they might. The first is environmental degradation. To understand why, it is worth remembering that if an individual earns $100, but in so doing destroys $100 worth of his own assets, then a strict accounting would say that he earned nothing.

The same is true with the environment…For example here is an that came out four months ago on Bloomberg:

China, the world’s worst polluter, needs to spend at least 2 percent of gross domestic product a year — 680 billion yuan at 2009 figures — to clean up 30 years of industrial waste, said He Ping, chairman of the Washington-based International Fund for China’s Environment. Mun Sing Ho, a senior economist at Dale W. Jorgenson Associates and a visiting scholar at Harvard University in Cambridge, Massachusetts, put the range at 2 percent to 4 percent of GDP.

Failure to spend that much — equivalent to the annual GDP of Vietnam — may cost the Chinese economy half as much again in blighted crops, health costs and pollution-related expenses, He said: “The cleanup can’t catch up with the speed of pollution” if spending is less.

This article suggests that a significant portion of Chinese growth came with a destruction of value that should have been deducted from that growth. After all, if you create net $100 of chemicals, but in so doing you pollute a nearby river to the extent that future economic production associated with the river is reduced by $100 (there will be less fishing, perhaps, or less agricultural production, or less usable water, or more health care costs), then the net value you created is 0, not $100, although of course you as the polluter might earn $100 today while the rest of the country loses $100 over the future.

There is no objective way to figure out how much of Chinese GDP growth should be reversed because of environmental degradation (and in this China is simply an extreme case – most countries to a lesser extent have this problem), but there is no question that the number is big, and the result is that we overestimate China’s GDP growth today and will underestimate GDP growth tomorrow. In other words environmental degradation simply causes us to take future growth and count it today.

And it is not just environmental degradation that may require a downward adjustment in GDP. What about misallocated investment? Doesn’t that do the same thing?

Of course it does. If you invest $100 today to create only $80 dollars of value, you will show an increase in today’s GDP that is lower than the reduction in tomorrow’s GDP as you pay the capital cost of the investment…..This means, once again, that you would overstate growth today and understate it tomorrow.

Every country wastes investment, but China does it on a massive scale. I would argue that at least 1-2 percentage points of Chinese growth, perhaps even more, might consist of this kind of misallocated investment-driven growth.

When you add the impact of misallocated investment and environmental degradation, the necessary cumulative adjustment to Chinese GDP might be huge. For example, if the two adjustments combined range from 2 to 4 percentage points annually, over one decade China’s “true” GDP (whatever that means), would be below the official numbers by anywhere from 16-31%. Over twenty years official GDP would be overstated by 31-52%. That means that we are massively overstating GDP today and will experience very low apparent GDP growth for many years in the future as the official number returns to some reasonable approximation of the real number….

And this is not the first time we have played this game. Look at Japan. Fifteen to twenty years ago Japan’s GDP was officially 17-18% of the world’s GDP and it was rapidly catching up to the US. Today it is 8%, and there seems to be no chance of it every catching up.

But can this really be true? Or is it possible that Japan’s official GDP growth was vastly inflated by misallocated investment before 1990, and vastly deflated by the repayment of that investment after 1990?

I think it’s the latter. If you look at the growth in Japan’s household consumption, you will find that household consumption grew much more slowly than GDP before 1990, and much more quickly after 1990. Household consumption might be at least as good an indictor of the real growth in wealth as production-side GDP numbers. So might it not be true that Japan’s official GDP was too high before 1990, and it has been slowly adjusting since then? And if this could have happened in Japan, whose investment growth was high but way below China’s, why can’t it happen here?

Having worked with the Japanese in their bubble years, I may be too conscious of the parallels to both the hype and the conditions on the ground in China. China is under more pressure (due to the state of the global economy and the expectations of its people) to keep employment high, but in the long run, building cities and office buildings that sit largely or entirely vacant is ultimately as wasteful as buying white elephant golf courses and resorts abroad. The losses on lending against land, which went into stock market speculation and a foreign buying binge, blew back to the Japanese banking system. As discussed earlier, the Chinese banks recovered from their 2002-3 banking crisis at the cost of considerable economic distortions, and it does not appear the officialdom can rely on the same covert bailout strategy a second time. So if they are hit again with serious loan losses, the real economy impact is likely to be more serious that the China bulls believe possible.

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40 comments

  1. chris Rogers

    Yves,
    There is no doubt that China’s official GDP figures are over inflated, a matter economists who actually deal with and know China rather well – most either live there or in Hong Kong – keep hammering home in numerous research reports.

    Dr. Jim Walker of Asianomics usually cites how electricity generation capacity – actual and in development – paints a somewhat different picture on the GDP take, ie, on a comparative analysis, actual usage of electricity produced/ consumed does not correlate with imagined GDP growth figures.

    Indeed, its interesting to note – given the huge geographical and economic disparities within China’s many provinces – that come regional growth figure time each year, each province posts rates more in line with Beijing’s requirements, usually above 10%, than with the actuality on the ground.

    However, China’s overall growth rate is impressive nonetheless, but at what cost we truly do not know – one things for sure, misallocation of funds and corruption is large with bubbles emerging in many sectors of the economy – most notably housing and commercial real estate.

    1. skippy

      Funny you mention this…’most notably housing and commercial real estate.”

      Hot money flows from China to Australia are assisting in propping up asset values downunder. I wonder what housing would be like with out it.

      Skippy…1800 klm of coast line effected by toxic/noxious flood waters (just to start with}, soon to be cyclone affected?

    2. kievite

      The question is not only about fudging the data in all areas. That practice exists in almost any state, especially in time of economic difficulties.

      Statistics in China as socialist state can be completely detached from reality as it is viewed as an ideological weapon both for internal and external consumption and as such in certain areas can be completely detached from reality (as in reporting profits on the bad loans or faking the production of a state factory that is unprofitable or even does not produced anything).

      As for fudging of data as seen via electricity consumption reports, the most interesting area is probably not in faking the reported data but in gross underestimation of inflation.

  2. kaan

    Michael Pettis has no real understanding how real economies develop.Industrialization process is complex and nonlinear process in which one has to incorporate many factors like return to scale, clustering, learning by doing, knowledge spillovers, hysterisis etc.
    If Koreans listened to people like Pettis they would not have a industrial base. The Chinese know much more how real economies develop than some so called pundits are enslaved their discredited models.
    6 years ago i was arguing with Brad Setser that China will build a formidable car industry and here we are today. If they did not invest huge sums there would be no indeginous development. Pettis argues against high speed train development but totally ignores the industrial benefits to develop and nurture that industry.Huge sums to develop airplanes seems waste to him but i bet anyone by 2020 chinese aviation industry will give US&EU duopoly a run for thei money. So directed long term industrial investment has much higher societal returns than Pettises of world cannot even imagine.

    1. Yves Smith Post author

      This is a complete straw man.

      1. There is ample evidence China is making massive investments in unproductive real estate.

      2. There is also ample evidence China is making investments in quite a few areas in productive capacity well beyond the ability of the world to absorb it in any conceivable time frame.

      3. You completely ignored his argument about environmental degredation, and my point about bad loans. To put that more simply, “What about Japan don’t you understand?”

      1. kaan

        The reason many developed world citizens enjoy higher standard of living is due to higher per capita productive capital stock.
        China seems to understand this simple fact.Since production
        possibility frontier should be expanded to catch up with developed nations new industries monopolized by small group of countries should be established. This process is much harder than it seems, requiring many building blocks and seemingly immense malinvestments like nurturing thousands of technical experts without showing up a profitable return for the next 15 years or so. Many clearly inferior first iteration products like first batch of cars, trains or aircrafts. Second or third iteration is a must to catch up with market leaders. This whole process look like a waste to many people but in fact the only way to conquer advanced industries heavily protected by the established players.

        1. alfred

          not only any high end technology but the business core itself that it is the ability to think outside the box(clearly a logical greek tool)is opposed to the greek thought as we all know that any chinese regard themselves as followers of their own pseudo thinkers modeling their mindset and that means in any chinese university a clear and unbearable separation outlined will be stressed between the Aristoteles types(western world) and Szun Tze mode(chinese world)..meaning the chinese identity itself is rooted in a non creative society built upon the shoulders of non abstract pseudo phylosophers that could never be a randomic and fruitful creative industrious one

        2. If only all of us could take such sweeping looks at history, eh? This sort of ‘vision’ reminds me of some sort of Communist view of the world – plenty of niggling facts get dissolved in such broadly expanded look at the march of history… and plenty excused.

      2. Stelios Theoharidis

        So what are our population assumptions when we make these estimates concerning Chinese commercial and residential real estate oversupply? When aggregate residential housing is counted do they include what I would suspect is a significant amount of housing in rural areas that lacks electricity, sanitation, etc? How does this impact our notions of oversupply.

        Now I have been following this argument for quite a while, and we have just discussed now the difficulty in trusting Chinese economics statistics. Can we potentially have the same issues in trusting Chinese population statistics as well. I am not trying to criticize these points being made here because I think malinvestment has occurred but I am curious about getting accurate information to determine what the scale of it is.

        So it is to the advantage of Chinese to understate their family size due to potential penalties related to the one child policy. Travel is also controlled, so that individuals that are not permitted to migrate would also have an incentive not to participate in a census. I am curious whether anyone with connections to China has heard similar things regarding population. I once heard that official statistics were 250 million short.

        1. Stelios Theoharidis

          On a further point of curiosity. Has the informal economy been integrated into these estimates. I have heard rumblings, I suspect even on here, that one of the reasons that there is such a disconnect between investment in housing and what we believe to be Chinese people’s ability to afford housing stock the is due to the considerable amounts of off the books economic activity and tax evasion going on.

          A cursory google of the topic: University of Macau article suggests 28.8% of urban GDP. Worldbank article suggests 13.8%.

          Frankly I didn’t read his article but did Pettis run these numbers when he makes his estimates? I used find on his article and informal was not included in it. What does that mean for our housing oversupply estimates?

    2. Even if what you claim is true, it does not invalidate Michael Pettis’ argument.
      China will not save the world’s economy as much of it’s high growth is phony. It’s a bubble and it will pop. Of course, a few people will have massively enriched themselves, while the vast majority will pay the bill.

  3. Siddhartha

    “i bet anyone by 2020 chinese aviation industry will give US&EU duopoly a run for thei money.”

    I’ve seen no improvement in the quality of Chinese fasteners in the last 20 years – they break at the slightest provocation (i.e. the use of a non-Chinese tool. Chinese tools will of course break before Chinese fasteners). Given that tens of thousands of fasteners are required to fashion an aircraft, and Chinese aircraft will undoubtedly be made with Chinese fasteners, how reliable do you think these Chinese aircraft will be? How long before a plane falls out of the sky because a 1 Yuan bolt broke? Who would be dumb enough to fly in a Chinese plane? I can’t imagine doing so myself. “Made in China” is synonymous with “Made of Shi+”. I would not bet on that changing by 2020.

    1. Yearning to Learn

      “Made in China” is synonymous with “Made of Shi+”.

      Now.
      the future can bring anything.

      I remember when “Made in Japan” meant “Made of sh*t” as well. That changed over just a generation.

      I remember when Hyundai was a bargain basement brand, fighting with Yugo. now it is mentioned in the same sentence as Honda and Toyota, although it is still a step below. How’d the Koreans do it?

      Thus, I wouldn’t be surprised if China can get car and aviation off the ground.

      all that said:
      it doesn’t negate Pettis’ argument (or Yves’ by extension).

      there are two things that are obvious
      1) Chinese economic data are inflated. both purposefully (municipal govts fudging data), and also non-purposeful (how do you account for economic degradation)

      and
      2) there is massive speculation/malinvestment in the economy.

      Few of us argue that investing in cars/aviation is a waste just because it has negative returns for now… or even 15 years.

      however, the Ghost cities are another matter.

      how, pray tell, are those going to pay off??? by the time people get into them they will need to be renovated (more GDP!!!!)
      ——

      one last thing:
      a point I didn’t see above but which I think is VERY important is the effect of “pass through” assembly on Chinese GDP.

      “Pass through” assembly inflates apparent GDP IMO.

      For instance:
      what happens when Apple (American Company) sends raw materials from around the world (Like Japan, Australia, etc) to China to be assembled, then brings the assembled product back to the US and sells it for big bucks?

      For instance, if $90 worth of parts is sent to China, where it is assembled for $10, and then sold in the US for $500.

      I don’t understand this well… but it would seem that the “real” Chinese GDP from this would be $10. but I believe that a lot of data uses the figure of $100. (hopefully not $500, but I don’t know).

      anybody know more about this?

      1. Yves Smith Post author

        You don’t appear to have read the comment.

        Siddhartha says with 20 years at it, the Chinese can’t make decent fasteners. That’s a relatively simple component. If they aren’t making progress, what is going to make that change?

        By contrast, the Japanese figured out how to make decent cars in that timeframe.

        And there is a very simple reason the Japanese and Chinese cases are different. Japan was the first industrial power in Asia. They were major steel manufacturers in the 1930s. They built their own airplanes (famously, the Zero). Their infrastructure was razed in WWII bombing, but their know how was not lost.

        1. Cedric Regula

          “what is going to make that change?”

          Boeing is outsourcing some components in China, GE just announced something to do with involving the chinese in GE’s avionics biz, GM and Volkswagon are the two largest domestic chinese car companies, Westinghouse-Toshiba licences 3rd Gen nuclear power plant modular components to be made in China….the list goes on.

          It’s just a matter of time before an American, European or Japanese company sets up fastener making in china and it’s all over.

          But what they really need is a zipper maker. My golf ball shag bag breaks zippers after a few hours of use. And it’s second one I’ve bought! I’ve resorted to holding it together with good ol’ American duck tape.

        2. bob goodwin

          I am largely sympathetic with all of your arguments, but the ‘fastener’ argument goes a step too far. The Chinese are making progress in their quest to industrialization. They have the Taiwanese (TSMC, FoxConn) who have beyond world class enterprises in China, a highly literate population, and a sense of destiny. I believe corruption and malinvestment will decrease. I do expect some nasty setbacks for them (such as on currency and military), but to think of China as a permanent Yugo underestimates their potential.

          China and India can raise their income per capita into the first world in a generation or two (for at least their urban populations). This is a necessary step to a better world.

  4. Carol

    I wonder how much externality accounting is being done in stating the US GDP? Is this even a valid argument?

    1. Yearning to Learn

      I wonder how much externality accounting is being done in stating the US GDP? Is this even a valid argument?

      I think it’s a valid argument, but nearly impossible to quantify.

      There is no question we have this problem in America as well, but the scale is lower.
      Google image “Beijing Smog” or “Shanghai smog” as example.

      Now, it’s not always that smoggy in Beijing or Shanghai. But it often is. and obviously we have smog in our major cities, especially places like LA and Pittsburgh, but again I’ve never seen smog in LA like I have in Beijing. you have to do panoramic pictures from the surrounding hills to really capture the smog in LA. In Beijing you can barely make out a building 3-4 blocks away.

      and that’s just air quality. Add in water and soil quality and it’s even worse on the Chinese side. Again, we have our issues but it is nothing like what an urbanite in China would have.

      we freak out just because there is a little melamine in our baby chew toys… imagine if all your food had it, or if your water smelled bad for years and then finally the govt just shut off all water to 6M people. that’s the state of their environment.

      actually, we won’t have to imagine long because that is what our leaders have in store for us. it will make us “competitive” you know.

      at this point, we have outsourced our pollution to china.

      1. Rex

        “but again I’ve never seen smog in LA like I have in Beijing. you have to do panoramic pictures from the surrounding hills to really capture the smog in LA. In Beijing you can barely make out a building 3-4 blocks away.”

        How old are you? In the “silicon valley” area, I can remember yellow skies in the late 70’s. Again, in the 70’s I remember a trip where approaching Denver from the flat east, the city was obvious on the horizon because it was within a yellow dome of bad air.

        These things were common in the US then, but we legislated rules that really worked to improve air quality. It added some costs to cars and industry but it worked. If the global economy doesn’t crash first, I assume China will eventually take the same steps to protect themselves from huge levels of pollution.

        1. skippy

          LOL in the mid 80s I was near the Griffith observatory and around 2:00PM, you would be lucky to see a stop sign at the end of the block, hence my residence on the beach for onshore breezes.

          Skippy…everything east of PCH is just hours of suburbia, land of a thousand silent screams.

        2. Matt

          I wonder how much of the air pollution is due to the diesel and fuel oil sulfer content. Or the coal used, or the emmission control devices on cars?

  5. Jim

    China certainly has some unsustainable ponzi scheme going on. It’s just not obvious at the moment. Whatever the case, my guess is the whole global imbalance mess should be out of denial in the next 2 to 5 years.

  6. pigeon

    It might be worth mentioning that the Chinese Government introduced a “green GDP” sometime back (I don’t remenber exactly when but it must have been around the year 2000). It roughly meant

    green GDP = GDP – environmental costs.

    It was given up later because its growth was not only 2% below traditional GDP (as Pettis estimates) but almost zero. But I heard that recently the idea was floated again so maybe we will get a green GDP reported soon.

    One question I have: It is always stated in the blogosphere that there is so much evidence of malinvestment in China. but so far the facts presented were rather unconvincing to me. That is not to say it ain’t true but some friends who visited China recently have rather had the impression of a very vibrant economy especially in real estate and they argued that high vacancies are not seen as so much of a real problem by true local experts in real estate. So I’m wondering if the idea of malinvestment might be overstated. Is it possible to get some kind of comprehensive fact on capital misallocation?

    1. Sartia

      Sorry, but was it this expert?

      I wouldn’t trust any of these Chinese property developers – even the Chinese don’t trust them.

  7. Methinkee that China is running itself into a major crisis of overinvestment. No one seems to want to call this what it is – but its an extraordinarily fragile economic model:

    Now look at the fall off in US imports in the fourth quarter of last year (13.6%, I believe) and consider that the future is likely to continue with this trend. Queue spooky music…

    1. Ignim Brites

      As China acquires more and more real capital though; especially the real capital to create real capital, it becomes less dependent on exports to earn foreign exchange. When China has the capital and technological savvy to run major oil fields and mines (in other countries), build computers and software, etc. it can be more and more autonomous in its monetary policy. That being said, it might be that the only limit on Chinese industrial expansion is population, which won’t be a problem for a few decades.

      1. Its not just a dependence on exports that’s wreaking havoc in China. Its the whole model of manic investment – investment that resembles the old railroad booms in the US in the late 19th century except on a gigantic scale.

        There’s simply too much capital in China – and, from what I’ve heard, the ethos there is currently ‘growth, growth and more growth’… its become nothing short of the Party creed. Gone is Mao – growth for the sake of growth has taken its place.

        If I were to take a wild guess at what would happen in the coming years (as your analysis was basically a wild guess), I’d say that the current social unrest will get worse. Eventually, through reform – or perhaps, in a country that experienced the Cultural Revolution only 40 years ago, something more radical – current institutions will be restructured along ‘planning’ lines. The state will then step in and take over the under-utilised capital and use it to employ the rioting, unemployed rabble.

        In short: “A specter haunts China…” – you know where I’m going with that.

        Bet you haven’t heard that analysis before! But, if you look at China as a whole – which nobody ever does – it seems to be a VERY likely conclusion to draw…

  8. What if China’s GDP is overstated? Consider me too cynical to be taken seriously, but US economic data can’t even be trusted. Just visit the Shadow Government Stats website if you need to any indications about that.

    1. Sunny

      I agree!

      Value discovery has been officially and legally BANNED by suspending M to M accounting standard in America.

      Amazingly When the bubble was ‘forming with froth’ no one complained about M to M accounting or the mega bonuses doled out under the same basis for assets under Banks management!

      Does any one the ‘value’ of MBSs on Fed balance sheet which they bought them from Zombie banks?

  9. Jim Haygood

    Let’s hone this argument a bit more. Even if top-line nominal GDP is accurate, an artificially-depressed GDP deflator would mean a cumulating error in real GDP, on the high side.

    Remember when the Soviet Union imploded, and the Soviet economy turned out to be half the size that phony Soviet statistics (and CIA estimates) had suggested?

    Well, America’s Soviet-style military empire in the arc from North Africa to the middle east to central Asia is falling apart too, just as the Soviet Union’s eastern European satellites did in 1989.

    Part of the reason is that observers, even those without the handicap of a PhD Econ, can see that foreign wars (including the perfect rhyme of Soviet and American blunders in Afghanistan) have starved the US economy of investment, driven it into financial crisis, and left it ‘liquid but insolvent,’ as gaping deficits force open monetization — the opening phase of the ‘Zimbabwe option.’

    The crippled US economy earns little respect abroad anymore. And when the post-collapse post mortem is performed, it likely will reveal that decades of malinvestment in the global military empire and the braindead ‘war on terror’ left it only a shrunken shell of what bogus statistics created for ‘national security’ purposes claimed.

  10. Hugh

    Exceptionalism seems to be the great myth of our times. We’re exceptional. China is somehow different from everyone else, as are the Germans (Europeans not so much anymore). It all appears to do with the perception of who is on top or appears to be on top at any given moment, and, of course, who is doing the perceiving.

    China’s just been pursuing a mercantilist strategy for the last 10-15 years. There is nothing particularly special about that. At the same time, it has spectacularly mismanaged the excess proceeds from this process. Instead of increasing domestic consumption, it has blown bubble after bubble. It keeps increasing industrial capacity but has done little to improve quality or engage in innovation. It was mentioned above that China has quickly built up an auto industry. Who cares? Anything based on the internal combustion engine is a deadend. Investing in it makes as much sense as betting on the horse and buggy in 1900.

    1. Chef

      You might want to check recent patent generation statistics. China is #5 in the world right now. Oh and the BYD F3DM arrived on American shores to be tested, and it has a higher electric range than the Chevrolet Volt. It’ll probably be cheaper too.

  11. kares jhangiani

    It is possible, perhaps even probable that China’s GDP is somewhat inflated, that buildings remain partially occupied, or, high speed trains are underutilized in off-hours, etc. But, facts are facts. Car sales create smog, especially, cars with no/poor smog controls. Measuring the negative effects of smog or wasteful investment upon GDP is very difficult. I remember that during the tech. crisis in 2000-1 much of the underground fat pipe internet facilities were considered wasteful; who talks about that now? These buildings will become occupied, as China shifts to more services in its GDP make-up. You don’t subtract from GDP low commercial real-estate utilization in New York or Houston, do you?

    My concern is really with Japan. Japan under U.S. pressure allowed the Yen to appreciate, which in turn drove much of the Japanese manufacturing industry to migrate to S.E. Asia. This greatly reduced future Japanese GDP, led to non-permanent workers and of course lowered growth in consumption. Just like the U.S., much of the residual work force in Japan is not of the “genius” variety; contrary to the 1980’s MITI forecasts of greater value-added products being developed in Japan, so that indigenous work-force will remain employed, the “strong” yen has pretty much ravaged Japan. That is what China is afraid of and rightly so.

  12. Max424

    Just for the heck-of-it I’ll take the bulls position: China (you heard it here first), is seriously understating their GDP — on purpose.

    That’s right, China is really growing at 12-14% clip, but pretends they’re growing a 9-10% clip, because they want to sneak up on everybody.

    Hey, it’s possible; who knows what’s going on over there, right? I don’t have much to support my contention, except the fact that China seems to be running their economy as if they were the USA, circa 1943. And we know what happened in ’43; US GDP reached its all-time high — 18%.

    One big difference between China now, and the USA in ’43, China is constructing useful things. Yeah, a lot of those useful things, like 70,000 miles of interstate highway, and 12,000 miles of HSR track, and entire newly built cities, are not at anywhere near full occupancy. But with a little luck, and some foresight, that could change. The main thing is: China is not building a whole bunch of stuff they’re going to scrap two years later, like the US did, in the early ’40s. That’s good for GDP.

    Now, if China can unlock their inner-consumer ( and there is a lot of inner-consumer to unlock), watch out! At any time, China could break out and go on a consumer binge that might last three or four decades. And with a national savings rate hovering above 25%, it would not be a debt driven bubble binge — like the US experienced over the last 30 years — but simply a reflection of Chinese citizens gradually drawing down their savings rate to a more reasonable, 15%.

    So, in the near future, if and when China’s consumers go wild, look for China’s annual GDP growth to top 25%.

    Note: It is true: China has been accepting the lion’s share of the world’s poison, and that’s not good. For sure, the Age of Poison has been -and is going to be — a be drag on China. And, of course, there is the oil question. China must perform a ultimate miracle; they must locate and extract tens of billions of barrels of oil from fresh (nearly dead) sources over the next 15-20 years, or the China Party is over. Good luck with that.

    1. greg

      I can’t believe this: are we reading the same Pettis over the last three years since GFC started?

      Pettis has broken records on China’s economy and he’s been wrong in pretty much everything with respect to China’s economy.

      Consider some of his biggest predictions/assertions:

      * China will be he hardest hit by the financial crisis and would be last to get out of it; the US would be the first to get out of it.
      * China’s stimulus programs are wrong and wrong
      * There would be trade wars against China – he predicted this every year based on his intimate conversations and dialogue with the US and European officials and businessmen
      * China’s best growth is behind us – he made this prediction in late ’08. He went on to publish an article on FT, saying that China’s growth rate would drop to 5-7%, at best, medium term. Lately in his blog, he further revised his prediction of China’s medium term growth rate to 2-3%.

      Some of his other repeated assertions/predictions/opinions on Chinese economy:

      1. China’s investment in shipping is wrong and wasted – made in the depth of the financial crisis. In fact, China’s shipping industry went to surpass the South Koera’s in every industry metrics: orders, delivery and size, a milestone not expected to achieve before 2015
      2. China’s investment in aircraft industry. Well China is continuing to make progress in ARJ-100, C919, J-20, Z-10 and a bunch of other civilian and military aircraft
      3. China’s auto market will “plummet” after the subsidies removed – this was made in around Aug 2010 based on some data earlier in the year. Guess what? China went on to make another record: hitting the 18 million mark and essentially double the auto market in two years
      4. China’s high-speed rail is a large misinvestment. This silly arguments have been refuted by many. I don’t need to repeat here.

      You can continue to spin the above predictions/arguments, but examine them in honesty and you get a sense of what Pettis knows about real economy, especially China’s.

  13. Alex

    Pettis has been right about basically everything related to China’s economy. He makes the foaming-at-the-mouth bulls and gloom-and-doom bears look foolish and two-dimensional by comparison.

    Every economy has hidden income and environmental damage. With China, however, scale is the real issue. They are investing, on average, almost 7 USD to generate 1 USD of growth: that is going to hit a wall at some point, as it did for Thailand, Japan, Korea, and Singapore in the late 1990s. I like this Nouriel Roubini quote:

    “[N]o country can be so productive that it can take, every year, half its GDP and reinvest it into more capital stock without eventually ending up with a huge excess capacity and a mountain of bad loans.”

    Investment share of 2010 Chinese GDP: 70%

    But Pettis is so right to put out that the America vs. China “GDP Race” is beyond silly. By PPP, China may already be bigger. On the other hand, if you take into account its damaged assets (loans, environment, unnecessary infrastructure) and how much of Chinese manufacturing actually derives its valued-added components from the US and other nations, Chinese GDP may be about on par with France or the UK.

    It’s a “race” where no one knows where anyone else stands.

    1. greg

      I can’t believe this: are we reading the same Pettis over the last three years since GFC started?

      Pettis has broken records on China’s economy and he’s been wrong in pretty much everything with respect to China’s economy.

      Consider some of his biggest predictions/assertions:

      * China will be he hardest hit by the financial crisis and would be last to get out of it; the US would be the first to get out of it.
      * China’s stimulus programs are wrong and wrong
      * There would be trade wars against China – he predicted this every year based on his intimate conversations and dialogue with the US and European officials and businessmen
      * China’s best growth is behind us – he made this prediction in late ‘08. He went on to publish an article on FT, saying that China’s growth rate would drop to 5-7%, at best, medium term. Lately in his blog, he further revised his prediction of China’s medium term growth rate to 2-3%.

      Some of his other repeated assertions/predictions/opinions on Chinese economy:

      1. China’s investment in shipping is wrong and wasted – made in the depth of the financial crisis. In fact, China’s shipping industry went to surpass the South Koera’s in every industry metrics: orders, delivery and size, a milestone not expected to achieve before 2015
      2. China’s investment in aircraft industry. Well China is continuing to make progress in ARJ-100, C919, J-20, Z-10 and a bunch of other civilian and military aircraft
      3. China’s auto market will “plummet” after the subsidies removed – this was made in around Aug 2010 based on some data earlier in the year. Guess what? China went on to make another record: hitting the 18 million mark and essentially double the auto market in two years
      4. China’s high-speed rail is a large misinvestment. This silly arguments have been refuted by many. I don’t need to repeat here.

      You can continue to spin the above predictions/arguments, but examine them in honesty and you get a sense of what Pettis knows about real economy, especially China’s.

  14. craazyman

    Hmmm. The cleanup might be it’s own demand spark for long-term growth. New green industries cleaning up the mess from the industrialization phase. Never for get thta one man’s cost is another man;s revenue — even health care. How many Mercedes are on the roads because people smoke and need lung care by trained MDs with all sorts of expensive machines? So the revenue came in to the economy for the cigarettes and then it comes in again at the hospital.

    It all starts at the Fed and reserves and then goes where it will, into the demand pockets, which can be created by wherever the Imagination and Nature waves go.

    One generation’s externality is another generation’s new industry. Not the same case with the real estate though. They’ll have to tear it down, probably. Of course, that will cost money too, so maybe it really will be just more growth. One generation gets paid to build it. The next gets paid to tear it down. LOL. Everybody big happy family. ha aha.

    That really is getting into the cycle of nature. UP AND DOWN. up and down. Crops grow, get harvested, repeat. The buildings grow and then they get harvested — money flowing on the waY up and money flowing ON THE WAY down. The wealth can’t stay still. It gets moved around like food on a plate. some falls of the table, but it keeps going into new mouths. None of this probably makes any sense to an economist. it might not make any sense period.

  15. a

    of course it is overestimated.
    hahaha,
    china’s gdp now is more than italy, england, france, germany and japan.
    every country above was angry about that when it happende, but now they are all friends of china again.
    they must accept the truth.
    the now is usa’s turn.
    so we see,
    that usa is the most worst beggar among them.
    they refuse to admit any progresses that other country has achived.
    they think they can do every thing in the world.
    they can release the sex-revolution to pollute the world.
    in fact almost every girl in usa has 100 men.
    they can make war to other countries to kill and to destroy.
    they can make economic crisis to destroy even ther allies like england or japan.

    but they refuse to admit that they are evil.

    but they do not even know the truth about 911.
    who had hit pentagon.
    why is WTC7 collapsed etc.

    this is usa.
    you do not shame on yourself?
    this is really rare.
    rare people in the world who had made so many bad things but
    do not shame on themselves.

    really rare!

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