I am about to tell you something which you probably don’t know.
The reason I say this is because I, myself, and most people I know didn’t know this basic fact, despite reading a lot about politics and economics.
The man below is called Michael Pettis
He is a professor of finance, working at Guanghua School of Management at Peking University (Beijing).
He alleges that China’s growth is less than half of what is reported:
So far, so “mainstream”. Many others have made this point. What is fascinating about his analysis is that he isn’t alleging that China is “faking” the numbers.
He is merely stating something he says is a fact – the way China calculates GDP is different from the rest of the world.
GDP isn’t a standardized thing. Even France and the UK calculate GDP in a slightly different way. China just calculates it in a very different way.
You could argue, perhaps legitimately, that every country has a right to calculate GDP in the way it sees fit.
That may be true, but we also, therefore, have to see how these different definitions might affect the overall picture.
As the old saying goes, “lies, damn lies and statistics”!.
To quote him directly “the Chinese economy operates under soft budget constraints. A hard budget constraint means “you’ve got to have the money to spend it,” whereas a soft budget constraint means there’s no limit to one’s spending and losses can in principle be rolled over indefinitely.
Local governments in China operate under soft budget constraints, in contrast to the hard budget constraints of other major Western economies, and because they comprise a significant share of economic activity, China’s GDP numbers are fundamentally different in nature and as such, incomparable.
He illustrates this point by two hypothetical, identical Chinas—with the only difference being one has hard budget constraints and the other has soft budget constraints.
In the first China, a construction firm spends $100 digging a hole, then $100 filling it up. “In a hard budget constraint economy or in a normal accounting, you have an expense of $200 and nothing to show for it,” said Pettis.
In the second China, a construction firm similarly spends $100 digging a hole, then $100 filling it up. “But in [this] China, you don’t expense it,” he explained. “You call it an asset.
You say, I have now built an asset worth $200.” This, Pettis noted, is how GDP accounting works in the China that we all know. What this means is that China’s official GDP figures as currently reported are significantly inflated relative to actual economic conditions, and are also impossible to compare with the GDP figures of other nations.
You can see the full article here:What China means when it says it wants “high quality” GDP growthBeijing wants to focus on quality over quantity of GDP growth, but that’s much easier said than done.https://qz.com/2119395/what-china-means-by-high-quality-economic-growth/
To give a simple example to his point, let’s say one province in China has a GDP of 600billion and the target is 6% growth (so 630 billion is needed).
Now let’s say there is so real growth of 3%. However, it is fairly easy, with the soft budget constraints for the local government to engage in unproductive (or low-yielding at least) investments to achieve the other 3%, which wouldn’t be counted in a hard constraint economy.
That is one reason there are so many ghost cities and excessive infrastructure projects in China, such as second and third airports in cities that don’t need them.
So, China grew by 5.95% in 2019 versus 2%-3% for the US, using both country’s accepted GDP growth measurements.
However, if you were to standardize the measurements, China and the US would have grown by a similar amount.
What is interesting is that he also appears regularly on the Chinese state, so his findings aren’t seen as embarrassing by the regime, and China itself is now focusing on “high-quality growth” because they recognize the problem.
I have yet to find somebody who has actually refuted his central claim that there is not necessarily any lying or manipulation going on, but the different use of statistics is distorting the total figures.
This should be interesting for investors thinking about investing in Mainland Chinese private companies.
I don’t think it makes any difference to those looking to invest in Chinese stocks because GDP growth and stock market performance often aren’t linked.
So, we can’t say that weaker GDP growth will mean lower valuations for Chinese stocks, especially as they look very cheap compared to some markets.
The current divergence between the S&P 500 and corporate profits after tax is the widest on record. It is possible to close the gap “down” with a recession.
is you know okay so there is a severe
error in reasoning and that that you
often hear by people giving you
empirical data and telling you for
example that were idiots to worry about
Ebola that killed two Americans when
more people slept with Kim Kardashian
that year okay so for example and that
was effectively the number they said
that more people slept with Kim
Kardashian in 2014 or worried about
Ebola then died of Ebola for example
right so now and then sometimes you see
numbers like these and this is the kind
of thing that that if you read something
called the New York Times and you still
read that nonsense this kind of stuff
you read in it which is factually right
but bogus okay well and the kind of
thing that teaches and psychology
department that so many Americans die
from eating too many hamburgers smoking
too much alcohol now let’s think about
it in terms of tails if I tell you or
let’s say Steven Pinker give the number
that 3,000 Americans died and their
bathtub every year
okay 3,000 people whereas three or two
have died of Ebola now let’s play
thought experiment if you read in the
papers if you go you know to Mars and
and then read on you know on Google News
that two billion people have died what’s
more likely to have killed them diabetes
obesity is falling the rest stop
sleeping with Kim Kardashian or Ebola
Ebola there we go so you cannot compare
rule number one
thou shalt not compare a multiplicative
fat-tailed process in extremists and in
the sub-exponential class to a thin tail
process that has what we call Chernoff
bounds okay and that is in totally for
mediocre stuff simply because of the
catastrophe principle okay and then we
know for example that is very cheap to
protect yourself from Ebola you see the
probability that people dying from
smoking okay it’s multiplied by 10 next
year is 1 to the 10 – into 10 – 30 the
probability that that the the rate of
people who died from Ebola through
triples is not vastly higher you see so
you cannot compare processes thin tail
to fat tails are not comparable so this
is not empiricism this is called naive
ampere system it’s actually worse okay
so you cannot compare two processes like
these by saying we worry too much about
Ebola in fact we were too much about
diabetes and too little valley bola so
that’s one error of reasoning that comes
from not understanding fat tails now let
me show you the law of large numbers
everything you’ve learned in statistics
is based on a well functioning of a law
of large numbers no all right so in
other words you that as you add
observation this mean that you observe
would be very stable no and the rate is
square root of 2 square root of n number
of observations you agree all right
this is what you have on the left now on
the right for fat tail process the mean
exists but it takes much longer to
much longer my only my anymore