The Simple Math of Chinese Staggering growth
Chinese non-export economy grew 23% in June! Before you start googling for that number, let me warn you. You won’t find it. I’ve computed it using fifth grade math.
Here is what we know: exports constitute about 35% of the Chinese economy and they dropped over 20% in June, while the Chinese economy (GDP) grew 8%. So the “X” is the growth rate of 65% of Chinese non-export economy.
0.35 x (-20%) + 0.65 x (X%) = 8%. If you were to solve for X you get 23%.
Enough with math, let me put this number in perspective. Chinese non-export economy grew at 3 times the rate of their GDP. I only have two, very contradictory, explanations for this:
1) The Chinese government is lying through its teeth about its economic miracle growth. It has the incentives to interrogate economic data until it confesses to the party line numbers. This is very plausible, as for months, the Chinese government was showing positive GDP growth while its consumption of electricity was declining. Obviously this doesn’t make much sense. Also, China is not famous for production of intellectual type goods (i.e. software, creation of toxic financial products – that is our specialty) which scale a lot better and don’t require proportional electricity consumption to grow GDP. China makes stuff and to make stuff you need a lot of electricity. Also, even if the growth is completely driven by building high story buildings (even if they collapse), highways, schools – these activities still require a lot of electricity.
2) The numbers are real, the monetary base was up 28.5% in June (again if you can trust that number) and thus the quality of growth is horrible. I’ve discussed this scenario in great detail.
I hate to leave on open-ended note, but only time will tell what is actually going on in China.
P.S. I was not surprised to learn that Jeremy Grantham of GMO – a value investor for whom I have a tremendous respect is concerned about the future of Chinese economy as well.
Kindest Regards,
Vitaliy Katsenelson, CFA
July 28th, 2009 at 4:11 pm
Alternately, the Chinese government has been underestimating growth for many years, in order to fight inflation. Now they can cheat the other way and let the official numbers reflect what’s really going on.
July 28th, 2009 at 4:16 pm
But but but … the Chinese were going to bail out Uncle Sam … they are the “engine of growth” that’s going to pull the global economy out of the ditch … what’s gonna happen now?
July 28th, 2009 at 5:52 pm
This is so dead on! (because I agree with you)
I’m not buying the de-coupling argument… China will depend on exports for a long time. You don’t wake up one day and decide to make your economy’s growth domestically generated. All that stimulus money is also likely getting thrown at those same areas in China that were already overextended…
If China has “de-coupled” and is the savior of the world, then I have a AAA rated CDO that I would like to sell you – that contains some middle tranches of other CDOs bundled together based on some optimistic assumptions about default rates and correlations. Or I could just sell you a bridge if you prefer.
July 28th, 2009 at 7:33 pm
If China’s reported retail sales are accurate, its not that much of a stretch. Up 15% in 1st half 09. Along with a small inventory build and a little inflation.
http://www.chinadaily.com.cn/bizchina/2009-07/16/content_8435646.htm
July 28th, 2009 at 7:57 pm
Their economy is growing so fast the Communist’s need a “stimulus:” program. Reminds me of the USSR ten year programs. The comrades just met with the BHO version of Communism and I wouldn’t be surprised if he suggested that we adopt China’s health care program. Actually there may be more doctrinaire Communists in our government than in the Chinese.
July 29th, 2009 at 12:43 am
Indeed, that’s what you will arrive at when you use 5th grade maths. They didn’t teach you the GDP formula in 5th grade, did they?
GDP = C + I + G + NET EXPORT
And NET EXPORT = Export minus Import
While the June export went down by 21.2%, the import also dropped by 13.2%. The net effect is a 5.6% decrease in NET Export.
Using your figure that Export is 35% of GDP, Net Export is about 6% of the GDP base on the June numbers (USD 121b export; USD 100b import). The non-export bit of the Chinese economy (C+I+G) is therefore only growing at (8% + 6%*5.6%) / 94% = 8.9%. Sounds reasonable?
I don’t trust the Chinese statisticians as well – but at least they are better than a 5th grader.
July 29th, 2009 at 6:29 am
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July 29th, 2009 at 6:59 am
[...] I highly recommend you read the entire piece: The Simple Math of Chinese Staggering growth. [...]
July 29th, 2009 at 9:35 am
[...] The math behind Chinese growth: http://www.ritholtz.com/blog/2009/07/the-simple-math-of-chinese-staggering-growth/ More discouraging news from Japan: [...]
July 29th, 2009 at 9:37 am
@slamian
Looking at the NET EXPORT math (in $US billions):
FOR JUNE: if exp=121 AND imp=100; then NET EXPORT = 21
if june exp∆=-21.2% AND imp∆=-13.2%; then FOR PRIOR PERIOD: exp=153.6; imp=115.2; NET EXPORT=38.3
THEREFORE: 21/38.3-1= 45.2% decrease in NET EXPORT in June
I don’t see the 5.6% reasoning.
July 29th, 2009 at 10:53 am
VitaKat .. born with that .. surnames abound on this homogeneous planet ….
“(i.e. software, creation of toxic financial products – that is our specialty)” got me laughing and reminded me of a unposted post I made follow’g the watch’g of all 3 segments (online) of Bernanke’s Town Hall Meeting filmed by the NewsHour in Kansas City MO
ie:
imo paper pushing jobs* are like leeches
2.5% to grow employment because newbies and productivity
is there a balance number* in relation to foreign employment and trade deficits and main street labor relations
paper pushing jobs:
politicians, lobbyist, marketeers, lawyers, accountants, bankers, realtors, secretaries, statisticians, media
opposite of paper pushing jobs:
making a widget from raw materials that has a value greater than the individual components**
(I realize the business of real products needs the paper pushers)
ie: that balance in GDP labor .. rewarding real effort in human comforts vs. comforts for phony paper pushing efforts
link to a reference not heard before by host Jim Lehrer:
http://www.noogenesis.com/pineapple/blind_men_elephant.html
** and why housing is so important .. because J6P can do IT and pumps the SuperCorps who make the base materials
NOW the Balance of population to IT all
July 29th, 2009 at 10:04 pm
@grmk
You’re are spot-on on the flaws in my calculations! Thank you for pointing it out. Having read your post, I go out and re-checked the figures:
“June exports dropped 21.4 percent year on year to 95.41 billion U.S. dollars, but the figure was up 7.5 percent from May.
June imports was down 13.2 percent year on year, totalling 87.16 billion U.S. dollars, but were up 15.6 percent from May.”
2009 June NET EXPORT = 95.41 – 87. 16 = $7.98 b
2008 June NET EXPORT = 95.41 / (1-0.214) – 87.16 / (1-0.132) = $20.63 b
Therefore the decrease in NET EXPORT should be (7.98 – 20.63)/20.63 = – 60%!
NET EXPORT as a proportion of EXPORT 2009 = 7.98 / 95.41 = 8.36%
Assuming the 35% quoted is correct, NET EXPORT as proportion of GDP = 35%*8.36% = 2.93%, say 3%
Therefore (C+I+G) is growing at (8% + 3%*60%) / 97% = 10%
I guess the point I’m trying to say is a lot of people are using the GDP figures without knowing the underlying meaning – and in this case – making sensational headlines out of it. However in doing so, I have committed a schoolboy error of my own. It certainly reminds me of my 5th grade maths teacher who hammered the best practice of doing maths into our minds:
1) Read the question carefully,
2) Do not ‘jump steps’, and
3) Check your answer before submitting!