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Is China's Economic Power a Paper Tiger?

November 27, 2017
Derek Scissors
China Beige Book
The People’s Republic of China has surely seen faster GDP growth than the United States for most of the past forty years. It's the value of that growth that's questionable.

The Chinese economy is strange in many ways. Not only is it a hybrid between private capital and state control, but very few people directly invest in the mainland — and yet everybody is interested in how the second largest economy in the world is going to develop. That’s because Chinese demand determines the prices of world commodities, and the operations of multinational companies in China impact earnings. When the yuan falls, markets across the world get jittery. China watchers accept the fact that official Chinese data is severely flawed, and often simply fabricated, yet they still use it to analyze the Chinese economy and markets because there are few alternatives. One alternative, however, is the China Beige Book International (CBB), a research service that interviews thousands of companies and hundreds of bankers on the ground in China each quarter. They collect data and perform in-depth interviews with Chinese executives.

This article is appeared on The National Interest

GDP Is Overrated, or Worse

It seems strange to say this with China having reported faster growth in gross domestic product (GDP) for decades. First, it’s worth asking if and when Beijing will admit that its economy struggled. For instance, China reported 7.9 percent GDP growth for the second quarter of 2009 yet continued the world’s largest loan program, and saw much of it turn to debt despite the supposedly fast growth. It’s almost as if the economy did not do nearly as well as the Communist Party claimed.

Still, the People’s Republic has almost surely seen faster GDP growth than the United States for most of the past forty years. The question is its value. For ordinary Chinese, disposable income (as reported by Beijing) is less than halfof GDP per capita. Disposable income is money that can actually be spent while GDP per capita is an accounting device, with little relevance in the real world.

Even less relevant is GDP adjusted by purchasing power parity (PPP). PPP requires computing a price level for all of China and comparing it to all of America, itself slightly absurd. It relies on “the law of one price”—arbitrage across open markets causing prices for the same product to equalize. Chinese market barriers mean arbitrage often fails. Related, PPP is meant to apply to consumer buying power, while consumption is less than 50 percent of Chinese GDP. GDP adjusted by purchasing power is a poor measurement for many countries, including China.

Net Private Wealth

Simple GDP is better than that, but it’s far from the only measurement and may not be the most important. The resources available to countries to pursue national interests are captured in net national wealth, which again takes the form of money that can be spent rather than an accounting result. If conceptualized and measured accurately, annual GDP should capture contributions over time to the stock of wealth. It should be not be surprising that Chinese GDP turns out not to be tightly associated with wealth.

Credit Suisse compiles net private wealth in most national economies going back to 2000. The data are unstable in that there can be later revision, so the most recent results should be considered tentative. Against that, there are two reassuring features: (i) any bias should be considerably smaller than the bias of the Chinese government and (ii) the results do reflect China’s rise through 2012.

From 2000–2012, net private Chinese wealth jumped from $4.66 trillion (less than India’s today) to $21.7 trillion, close to a 14 percent annual growth rate. American net private wealth over the same period rose from $42.3 trillion to $67.5 trillion. While the absolute advantage for the United States expanded, it did so by only $8 trillion because U.S. annual growth was only four percent. China was easily outperforming.

The situation has changed sharply since then. From the end of 2012 to the middle of 2017, Chinese net private wealth has climbed $7.3 trillion, annual growth never touching 9 percent. American net private wealth jumped $26 trillion. The American base was much bigger and American growth also became a bit faster. The result: mid-2017 Chinese net private wealth was $29 trillion and American net private wealth was over $93 trillion. The Federal Reserve supports the Credit Suisse number, putting American household net worth at $96 trillion.

Just as GDP is not the perfect measurement of economic performance, nor is private wealth. Neither provide information about growing global concerns about inequality. But wealth does reframe the U.S.-China discussion. Claims that China is about to eclipse the United States are untenable in the face of $64 trillion less in net private wealth. Claims that China is outpacing the United States are challenged by the private wealth gap widening by $18 trillion in the past four and a half years after widening by less than half that the previous twelve years. In terms of private wealth, China is barely visible in America’s rear mirror.

The Public Sector

Of course Credit Suisse could just be wrong about the PRC. And there are two more questions to raise. The first is whether U.S. dominance since 2012 reflects American stock and property bubbles being bigger than China’s property bubble, so that the gap will narrow when all bubbles pop. This is entirely possible, but will not matter much. Private wealth declines of the magnitude seen during the global financial crisis, for instance, would leave the U.S. $56 trillion ahead, the same-size gap as 2014.

The fundamental limitation of net private wealth lies in “private.” It is total national wealth which enables pursuit of national interest—the public sector must be included. This is not an easy task. The Party suppresses information on debt problems in the PRC’s huge banking system. The U.S. government’s evaluation of public-sector assets is questionable. However, U.S. federal debt and gross Chinese state assets are both very large, narrowing the wealth gap.

There are official Chinese data on state corporate assets that at least have been internally consistent for some years. These put mid-2017 gross assets at 145 trillion yuan and liabilities a bit over ninety-five trillion yuan, for $7.4 trillion in net state corporate assets at official exchange rates. However, there are strong incentives for state firms to overstate assets and understate debt. This corporate asset figure should be seen as a maximum.

Other public liabilities include central and local government debt. These are considerably smaller than state corporate debt—their official level was $4.1 trillion at the end of 2016. Beijing’s numbers for this have become suspiciously stable and a comparable Bank of International Settlements (BIS) number is $1.1 trillion higher at the end of March 2017, rising such that $5.3 trillion can be used as the mid-2017 estimate.

The biggest state asset beyond corporate holdings is land. It is generally difficult to assign value to large amounts of land because mass sales would cause prices to plummet. It is more difficult in the PRC due to the government’s distorting role. Data over time on revenue from land sales imply a very round value of state land assets of $3.7 trillion at the end of 2016. It is probably a bit higher by mid-2017, though sales are unstable.

This land value could be too low, just as corporate liabilities are probably too low. But the errors run against each other, leaving a rough estimate of public sector assets as adding $6 trillion to net private wealth. Chinese national wealth mid-2017 is therefore approximately $35 trillion, perhaps a bit higher.

On the American side, the main event is federal debt, $19.8 trillion in mid-2017. State and local debt added almost $3 trillion to that. Simple. The problem lies with assets, meaning property.

The federal government owns over 27 percent of all U.S. land while state and local governments push that above 33 percent. Estimates of the worth of this land run from less than $3 trillion for federal and local combined to more than $125 trillion for just federal (using dubious assumptions about commodities). The Federal Reserve puts U.S. government nonfinancial assets at $14 trillion in mid-2017, $10 trillion in state and local government buildings, so its figure for U.S. net wealth exceeds $88 trillion.. But selling those buildings would crush prices, implying a far lower present value.

An indirect calculation based on broader Federal Reserve real estate data yields $9.1 trillion in combined government assets mid-2017. This puts the American public sector position at negative $13.6 trillion and net national American wealth a little below $80 trillion. The wealth gap closes when the public sector is incorporated, but it’s still huge.

American Choices

Land value estimates are imprecise, at best. Asset prices mean wealth can shift sharply. The Credit Suisse private wealth data have been—and can again be—revised. But Credit Suisse, the U.S. Treasury, the Federal Reserve, the BIS, and even the Chinese government (with respect to state corporates and land sales) provide cohesive data over time.

The United States is nearly $45 trillion ahead of China in net national wealth. Further, the gap is not presently closing. It is not closing in private wealth in isolation, it is not according to BIS debt data, and it is not according to this calculation method which utilizes Chinese reporting. In this sense, faster Chinese GDP growth is revealed as somewhat meaningless, at least starting this decade.

If America chooses not to compete with China in East Asia or lead globally, then no wealth advantage matters. When and where we choose to compete, the resource advantage rests overwhelmingly with us, and it will for the indefinite future.

Derek Scissors

Derek Scissors

Chief Economist
China Beige Book
  • China Beige Book International.
  • Oversees the firm’s data analytics operations as well as China Beige Book’s proprietary database, which is now the largest private database in the world on the Chinese economy.
China Beige Book

China Beige Book

Reliable data on China’s economy are notoriously difficult to come by. Official Chinese government figures exist, but lack transparency and credibility, while the few private indicators that exist are far too limited in size and scope for strategic planning.

We founded China Beige Book International in 2010 to help institutional investors and corporate CEOs navigate China’s notoriously black box economy. Today we operate the largest private in-country data-collection network ever developed to track the Chinese marketplace, gathering real-time economic data from thousands of firms across all of China’s regions, sectors, and 34 discrete industries.

Our flagship platform provides independent data and in-depth analysis on every key component of China’s diverse economy—from growth dynamics to labor market and inflation trends to the world’s only tracker of the credit environment and shadow banking.

These data are the principal drivers of our advisory work, allowing our globally-recognized team of experts to guide clients through the noise while staying ahead of critical market-moving trends in the world’s second-largest economy.

Channels

AsiaStrat
Granite Peak Advisory
Track Research
Trivium China
Gao Feng
Real Estate Foresight
China Beige Book

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Derek Scissors

Derek Scissors

Chief Economist
China Beige Book
  • China Beige Book International.
  • Oversees the firm’s data analytics operations as well as China Beige Book’s proprietary database, which is now the largest private database in the world on the Chinese economy.
China Beige Book

China Beige Book

Reliable data on China’s economy are notoriously difficult to come by. Official Chinese government figures exist, but lack transparency and credibility, while the few private indicators that exist are far too limited in size and scope for strategic planning.

We founded China Beige Book International in 2010 to help institutional investors and corporate CEOs navigate China’s notoriously black box economy. Today we operate the largest private in-country data-collection network ever developed to track the Chinese marketplace, gathering real-time economic data from thousands of firms across all of China’s regions, sectors, and 34 discrete industries.

Our flagship platform provides independent data and in-depth analysis on every key component of China’s diverse economy—from growth dynamics to labor market and inflation trends to the world’s only tracker of the credit environment and shadow banking.

These data are the principal drivers of our advisory work, allowing our globally-recognized team of experts to guide clients through the noise while staying ahead of critical market-moving trends in the world’s second-largest economy.

Channels

AsiaStrat
Granite Peak Advisory
Track Research
Trivium China
Gao Feng
Real Estate Foresight
China Beige Book