Fairy stories about China's 'economic crisis'

The present rapid shifts in the international and Chinese economic situations, resulting from the second wave of the international financial crisis centred on the Eurozone, are a challenge both to policy makers and a major opportunity for those with an accurate analysis of China's economy.

 

China speed [By Jiao Haiyang/China.org.cn]

 

The reasons for this are the same as those when I ran a consulting company and knew inaccurate media analysis was an opportunity to make a profit. Businesses need accurate information to take correct decisions. If a newspaper writes an economy is going to boom when actually it suffers recession, the paper doesn't directly lose anything, but a company acting on the wrong analysis can lose a great deal of money. Economic and business writing therefore operates under an objective discipline which doesn't necessarily exist elsewhere - companies rationally pay a great deal of money for accurate information.

The reason a similar opening exists in China at present is that attempts are being made to convince businesses that China faces an 'economic crisis' on the same scale as that hitting the European Union (EU) and the US. This view is factually nonsense, as any comparison of economic data shows. In the four years to the latest data the US economy grew by 0.5 per cent, the EU's shrank by 0.3 per cent, and China's economy grew by 42.2 per cent. Given such comparisons claims that China is suffering from 'crisis' is rather like saying the US has cholera, the EU has typhoid, and China has a cold and therefore they are basically in the same situation as 'all are ill'. Such claims destroy rational scales of comparison and are therefore wholly misleading in predicting what will happen.

China's economy naturally faces problems - all economies always face problems. It has had excessive house price increases, which are now gradually coming under control, and its consumer price index has been too high - although again it is now falling. Recession in the Eurozone will reduce orders to China's exporters. But China's economic year on year growth rate in the last quarter was 9.1 per cent compared to 1.5 per cent for the US and 1.4 per cent for the EU. If the US and EU were paralleling China's growth far from claiming, this was a 'crisis' they would be calling it an unprecedented boom!

A typical example of such fairy stories regarding China's 'economic crisis' was a recent article in the Wall Street Journal by Nouriel Roubini and Ian Bremmer president of the Eurasia Group - a risk analysis company. This was entitled 'Whose economy has it worst?' and was introduced: 'With Europe, China and the US in crisis, the real question is which of them will stumble first.' The data already given above show such statements are bombast - there is no crisis in China's economy similar to the US or EU.

Why, therefore, are such economic fairy stories published, why are they are publicized, and how to profit, not purely monetarily, from them?

One reason they appear, of course, is simply that people make wrong analyses. But the reason they are publicized is different. Take for example Gordon C Chang. He wrote a book in 2001 entitled 'The Coming Collapse of China'. This argued 'A half-decade ago the leaders of the People's Republic of China had real choices. Today they do not. They have no exit. They have run out of time.'

In the ten years since China's economy more than doubled in size. After such radically wrong predictions you might expect that Chang would find it difficult to obtain coverage for his analysis. But instead he is regularly published by Forbes magazine with articles posing such questions as 'Can Beijing rescue a stumbling economy'. Some 'stumbling' with nine percent GDP growth! Such analyses have nothing to do with reality but fit the politics of Forbes - which specializes in analyzing the ultra-rich in the US and is hostile to China. 

Business people caught up in such political maneuvers can lose huge sums of money. For example, in a case rather similar to the one of China at present, those backing a particular political grouping in Russia in the 1990s persuaded US hedge fund manager George Soros to become involved in a takeover battle around a Russian telecommunications company Svyazinvest. I was retained as a consultant by others involved and concluded Svyazinvest was a terrible investment. Therefore Soros was being pulled in for reasons of political maneuvers and not serious financial analysis. Soros lost approximately a billion dollars.

Companies rightly analyzing that China's economy will continue to grow, GE and Goldman Sachs immediately come to mind, are those most successful in business in China. Equally there are Western analysts who correctly predicted China's growth over the last period - Goldman Sachs Jim O'Neill, who invented the term BRIC, and the specialized consultancy Dragonomics for example.

This gives a major opportunity to those with an accurate analysis of China’s economy. Businesses following the erroneous view that China's economy is going to drastically slow or enter crisis will lose money. Those who rightly predict China's economy will continue to grow rapidly will gain credibility. This requires accurate analysis and reporting - not pretending there are no problems in China's economy but correctly contextualizing that these are far less than in the US and EU. The facts over the next year, as in previous years, will simply show that China’s economy continues to grow strongly, suffering no economic crisis qualitatively equivalent to that in the EU and US at present.

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This article originally appeared on China.org.cn. It has been amended to remove references only relevant to readers in China.    

Comments

[Harry]

Thanks John. Jim says that one must remember that China's banks have liabilities against the foreign reserves ie bank deposits of exporters. Thus, its not as if the funds are actually available. What is your view on the debt at 200% of GDP - he states that this debt is at municipal and other levels, not the central government. This makes it as badly indebted as Japan and worse than Europe and the USA? I take your point re he has no serious understanding, I am trying to understand myself and you are well placed for these questions.

[John Ross]

Jim Chanos provides only anecdotal evidence, no systematic statistics, always an invalid method of argument, for real estate development. China's banks are owned by and therefore backed by the state which has no significant budget deficit and if required can easily refinance them - so far it is not necessary. So there is no serious risk to China's financial stability. He also confuses share prices, which are likely to remain weak in China, with the growth of the real economy - the two are statistically negatively correlated http://ablog.typepad.com/keytrendsinglobalisation/2011/12/statistical-data-shares.html. Also he does not note that China's finance available for investment, $3.1 trillion in 2010, is now almost twice that of the US.
In short he has no serious understanding of the real fundamentals of China's economy

[Harry]

What are your views on the (seemingly rational) comments made by Jim Chanos re empty real estate developments, weak balance sheets of developers, banks and (in total) China debt to GDP of more than 200%? These are short term views, whilst your's are longer term.