Wednesday, January 16, 2013

Tracking the Chinese Economy

[Tracking relevant Events and Analysis of the Chinese Economy in an Ongoing Manner]

Official Inequality Data Released after More than a Decade
A significant economic event took place on 18th Jan, 2012 with the official release of new income inequality (Gini coefficient) data for China - after more than 12 years. 

According to Ma Jiantang, the head of the National Statistics Bureau of China, the figures for the last 4 years are : 2009=0.490,2010=0.481,2011=0.477,2012=0.474。
Inequality seems to have peaked in 2009 and declined somewhat after that. This probably indicates that government policy geared towards inequality is having some positive effect. The data released prior to this was in 2000 when the Gini coefficient was 0.41. The equivalent US inequality data for 2010 was about the same as China in 2012 - 0.47.

Considering how centrally important a topic Inequality has become for China, it is rather strange that this  economic data had not been issued out for more that a decade!
Last year, the reason given was, difficulty in estimating the income of the rich persons.

Although, there has been no release of official inequality data for a decade by the Chinese authorities, there have been some unofficial efforts. The International Institute for Urban Development, a Chinese think tank, estimated China’s 2010 Gini coefficient at 0.438. A Texas A&M professor Gan Li, did an independent household survey, to conclude in 2012 that the Gini number for China at 0.61!! The World Bank had published 0.425 as the inequality coefficient for 2005. Moreover, the CIA in 2009 had calculated that the Gini coefficient for China was 0.48. The CIA inequality figures for the US in 2007 were 0.45.

After the release of the Gan Li data, it was felt that the China had entered a period of dangerous socio-economic instability. But the new data released by China which is in line with the CIA estimates, indicates that inequality while disturbingly high, is not as dangerous as was being thought recently. Significantly, the recent figures are showing a welcome declining trend.

Inequality in income distribution, raises fears of social instability. But Martin Whyte, a professor at Harvard and author of "The Myth of the Social Volcano" says, that, the link between inequality and instability is not so straightforward. He says, “It is subjective popular perceptions of fairness or unfairness, not objective income and wealth trends that contribute to instability.” . In his opinion, public cases like Bo Xilai which attract attention of the ordinary Chinese people to corruption, make them more angry about social injustice.

Read The Wall Street Journal, The Reuters and Business Week . The Financial Times reports that this data has met with  skepticism - even in China. Read here

The Economy's Latest Performance - Q4 2012 GDP results
The latest Quarterly Economic Performance  Results of China - for Q4 2012 - are just out (18th Jan). Q4 growth was 7.9% as against the current expectation of 7.8%. This has to be seen in the backdrop of a low 7.4% growth rate in Q3 2012. Annual growth rate for 2012 comes to 7.8%. 
There are 2 ways to view these results:
First, the interpretation of the results can be categorised as - China's economy posts slowest or weakest annual growth in over 13 years. Read here.
Second, these results can be viewed optimistically as a rebound from a fairly low point by standards of the Chinese economy. Read here or here.

Both interpretations are correct! This was a bad year when quarter-wise growth fell to its lowest in a long time and so a certain economic weakness is an acknowledged fact. But more importantly, growth now seems to have bottomed out towards the end of the year. The quarterly results of Q4 2012 show a distinct upward trend compared to Q3 2012. The next quarterly results (Q1 2013) should confirm this analysis further. The next few quarters will not only confirm that the decline has been arrested but will also confirm whether this recovery will be a L-shaped recovery (economy stays around the 7.8-8% mark), or whether this will be a V-shaped recovery (economy rises further beyond 8%). The doomsayers predicting a hard landing for the Chinese economy will have to hold their horses for the moment. One also needs to keep in mind, that there has been some slippage as compared to the prediction of Institute of Economic Research of Renmin University of China for an growth rate of 8.4% in Q4 2012. Read here.

Government policy can keep warding off economic disasters - for a very long time through short-term measures by using essentially 2 options - either by burdening a section of the population and  making it pay the bill - say by continuing to extract surplus from migrant  workers and the household savers whose savings fetch very poor returns, OR, through profligate policies which keep reflating the bubbles (real estate, mining, etc) in the economy but in return lead to a greater future disaster. Probably the controllers of the Chinese economy are successfully using both options to keep the growth momentum alive. Is there a plan to maintain high sustainable levels of growth till they attain the prize of being the largest economy in the world - before they slowdown to address the deeper structural problems? 

In another perspective the Financial Times quotes premier-designate Li Keqiang's view of Chinese economic statistics as being "man-made" and probes the real condition of the Chinese GDP growth through an alternative set of calculations which make use of power production and rail freight, etc. This concludes that the economy tanked quite low - to 3.5% in mid-2012 and has risen to 5.5% since. Importantly, it also mentions that the good period of the Chinese economy ends by mid-2013. Collapse of export demand, inflation and controls over wasteful government spending will lead to another drop in growth. Read here.

What can however be concluded is that in the short-term, despite the drop from 10% growth levels, the economy is being managed fairly safely and skilfully. But whether the deep structural issues facing the Chinese economy in the long term are being addressed successfully - that is an open question and an entirely different matter. Some of the arguments for this ongoing debate can be tracked below.

1. Lardy-Pettis Debating China's Economic Future
Post the Economic Recession, China has continued to blaze a high growth path thanks to its solid basic macroeconomic situation which allowed it to go in for large financial stimulus without facing any fiscal challenges - unlike India. But since then, China's growth figures have shown some decline. Recent numbers shows growth in the third quarter of 2012 at just 7.4%.  This has spurred a debate between 2 sets of economists. One set seems to think that 7% – 8% growth is the new normal unless China reforms and rebalances its economy from an export-investment led to a domestic consumption led model. Another more pessimistic set of economists (Patrick Chovanec, Michael Pettis, etc) argue that in fact the China economy has deep structural weaknesses and a further sharp slowdown in China’s economy is inevitable. Its growth is set to decline to an unprecedented 3-4 %. This debate as one will realize is of tremendous political significance as the legitimacy of the Chinese regime is supposed to depend on delivery of economic prosperity and a baseline growth rate of 7-8% becomes essential.

China Real Time page of Wall Street Journal, asked two leading experts on the China's economy to debate this out : Is China Still Rising albeit more moderately, or is the Chinese growth rate set to tumble to unprecedentedly low levels?

Nick Lardy, an expert on China’s economy at the Peterson Institute, argues current growth rates can be sustained. Michael Pettis, a professor of finance at Peking University, argues that a further sharp slowdown is inevitable. 

The debates are covered in the following 2 posts:
Round 1 of this Debate
Round 2 of this Debate

It covers the Chinese Financial Markets and aspects of the Chinese Economy
A few of his interesting posts:
Among the points highlighted here, he author mentions that economic parameters on the ground suggest a sharp slowdown. He points out that despite extremely low interest rates (cheap credit), the private sector is keeping away from investment. This is because the returns on investment are too low and cannot match the low interest rates. It is the State-sector which is the center of the huge investments taking place in China. The SOEs know that they are protected and so can venture into investment even in these uncertain times. Liberal economists have had a tough time explaining the excellent performance of the SOEs in the 2000s. Pettis tries to deconstruct this by arguing that the SOEs have outperformed the private sector in China because they have been in monopoly markets and so have extracted rents from the liberalized downstream sectors and consumers. This has a growth-undermining impact on the downstream private corporates. This marvellous performance should not be taken as a proof of their efficiency vis-a-vis the non-SOEs.
After making rebalancing plans for the last few (seven) years, Pettis feels for the first time that maybe the long-awaited Chinese rebalancing may have finally started. He suggests some pointers for proceeding with the rebalancing and warns that trying to revive the unsustainable aspects of the economy ('bubbles') now will only lead to a hard landing (crash) of the economy.
How to be a China bull? (October 2012)
He argues that those who are bullish on China either base themselves on the past. That, the future will be like the past! Or they base themselves on predictions of others. That, China story is safe because so many reputed people have said so in the past. He says that the Chinese model has always been flawed but they have managed to avoid the consequences of their profligacy because of the high savings rate of the people.
He argues that the China Growth Model is set for a change as the West will now import less from China and so China's growth rate is set for a deep dive.

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