China’s GDP and Questions of Strength
By Barry Ritholtz - August 20th, 2010, 9:37AM
From Stratfor:
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Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data, ability to repeat discredited memes, and lack of respect for scientific knowledge. Also, be sure to create straw men and argue against things I have neither said nor even implied. Any irrelevancies you can mention will also be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.
August 20th, 2010 at 9:59 am
Agrees with what Michael Pettis has been saying.
After Communism was abandoned, there is no longer an ideology, analogous to religion in medieval or renaissance Europe, to give the government legitimacy. Instead, the government’s legitimacy is based on rising standards of living. If, as Stratfor, Pettis, Chanos, Hendry, et al say, the Chinese growth model is unsustainable, major political turmoil is likely down the road. It may be that China is going to give the lie to all those putting it forward as the next superpower. It may be the next Russia.
August 22nd, 2010 at 12:28 pm
Undue weight, broadly in the financial analytic community, seems to be on “financial” issues relating to China, and this post is no different. The exchange rate, property prices, loan performance, money supply mentioned elsewhere, and point mentioned in this video won’t determine global rankings.
In fact, especially for China, I’d suggest such metrics are entirely misplaced, given the political/economic/legal/governance structures. A higher level of analysis is perhaps a better, or if not better, at least may be the only form of meaningful analysis possible.
For example, if a Chinese bank is weak and insolvent due to bad investments, does anyone doubt that before any internal ramifications (on workers/politicians or domestic system more broadly) occur, that aid/or restructuring will occur? May not help foreign minority investors, but Chinese economic and political system would not be put at risk, and visibly shaken by such events.
At a higher level of analysis, briefly:
* China has extremely efficient economy, with lower cost inputs (labor, infrastructure and management), and huge economies of scale.
* Huge accumulate historical profits/wealth (in form most concretely of 2.3 T$ of reserves at SAFE, but other tangible structures, with virtually no meaningful external liabilities. Internal liabilities, and assets, are obviously just accounting entries owed to themselves.)
* A political structure, which some may take issue with, which is “incentivized” to maintain high economic growth, low economic volatility, and can only do so with some modicum of competition (and therefore “creative destruction” in a planned type of way), and competence more generally.
I know first hand, in China some of GDP is GDP just for GDP’s sake…i.e. repaving sidewalks that don’t need repaving; but they have the accumulated wealth to essentially manage that trajectory forever, without even reducing “net creditor” position, much less wiping out the 2.3T$ they’ve accumulated. (Of course projects are not for GDPs sake, but for “jobs” sake…)
One last note…Currency is a red-herring. Revaluation of exchange rate, say by 25% over next three years, could/would merely be offset by reducing RMB denominated huge raises and income measure by an offsetting amount (i.e. instead of a 20% raise during each of next three years, a worker might instead get a 10% raise over three years), meaning not one iota change in net competitiveness of nation… Ultimately economics, and prosperity comes down to being productive…financial architecture, including exchange rate, is just a system of motivating tools, and keeping score. (Of course there are few, if any, cross boarder “nominal” contracts based on the RMB exchange rate, given capital controls.)
The Chinese are, and will remain motivated to grow and compete, it seems to me. The global race is on, as it has been since the first civilizations formed 5000 years ago…