Much of China's GDP vanishes into thin air
Recently, the Chinese economy edged past Japan to become the world's second largest, and most economists believe China is on course to overtake the US to become the world's biggest by 2030 or so. However, not everyone believes China's recent crossing of that statistical milestone is significant, or that it will inexorably surpass the US.
Dr Derek Scissors, economics research fellow at the conservative think-tank Heritage Foundation's Asian Studies Centre, points out that the headline GDP number exaggerates the Chinese people's prosperitylevels.
In an interview with DNA, Scissors says that a flawed economic structure in China — where individuals subsidise large state-owned enterprises — has fed an extraordinary imbalance.
Recently, China's GDP edged past Japan's to become the world's second largest economy.
How significant is the crossing of that statistical milestone?
It's not very significant, for two reasons. The first is that this is old news. If you properly count Chinese GDP — which the Chinese don't seem to ever do, since they're always finding new GDP they missed —China's GDP using normal exchange rates passed Japan's maybe three or four years ago. And if you adjust for purchasing power parity, China passed Japan 15 years ago.
Secondly, the flaw in China's model is that not much of the GDP is delivered to households and individuals as it is in other countries. Much of it is siphoned off to state-owned enterprises or vanishes into thin air.
So, when we look at China's GDP growth, we get an exaggerated version of how rich China is getting. But the disparity between headline GDP and per capita income isn't unique to China"¦
It's not unique to China, but it's worse in China than in any major economy.
Chinese society is structured to have people subsidise companies. I'm not picking an issue with the size of China's economy; what I'm contesting is the actual prosperity delivered to the people.
On the same count, aren't projections that say China will be a world's biggest economy, overtaking the US by 2030 or whenever, significant?
I think we should be cautiously interested. I say 'cautious' because the idea that you can take the last 30 years' growth and project it for the next 30 years is absurd. Look where China was from 1950 to 1980 and then from 1980 to 2010. Look at Japan from 1960 to 1990 and then from 1990 to now. Major economies can undergo sharp changes in their trajectory, for better or for worse. The idea that you can project China's growth into the future is silly.
However, China does have 1.3 billion people. GDP — not necessarily personal income — is growing quite rapidly, and if China handles its economy correctly, it will surpass the US in 15-20 years. But if it doesn't handle it correctly, it will hit a wall like Japan did, and at a much lower income. So, there are many possibilities, but only one of them is the idea that China inexorably passes the US.
What are the 'right' economic choices for China — and the 'wrong' ones?
You could say I have an ideological bias, but I have Deng Xiaoping on my side. In 1978, he sensed that the only growth that was coming was from the assignment of property rights to farmers. So he introduced market reforms. And when he left power, he anointed a set of successors who were also committed to that path. But the current government is not just not committed to market reform, it is committed to state-led growth.
But hasn't the state-led economic model worked in China?
I don't think it has delivered as much.
China was reforming for 25 years, till about 2004, when the market gave way to the state. The problem is that the state isn't organised to create wealth. In a few years, we will see China's labour force start to contract. Return on capital has dropped because of so much state investment. Returns from land are dropping because of overexploitation, and the way China can grow going forward is like every mature economy — from efficiency — but the state is not organised for it.
You're also sceptical about the authenticity of Chinese economic data. What's wrong with it?
About a million things! Everybody knows — and even the Chinese government has admitted — that China's official urban unemployment rate is understated. But they continue to put out lower unemployment figures for political reasons. The provinces report higher GDP growth and foreign investment than the central government reports. On the technical side, China uses the pricing value for its components to GDP — like investment and consumption. When prices are soaring, China tends to use a lower price and makes GDP growth look like it's not out of control; and when prices are dropping, it uses a higher price, and it makes it look like GDP growth is strong. So what you get are smooth patterns of economic growth delivered by a developing economy that's vulnerable to outside shocks. Very unlikely!
When China announced the depegging of the yuan, it was anticipated that it would appreciate against the US dollar, but it hasn't happened. Given the political atmosphere in Washington, is there a risk of trade friction?
It's a political problem more than an economic one; although there are serious economic problems with Chinese policy, the yuan isn't one of them. I don't believe the yuan was ever
depegged against the dollar. People get excited by a 0.2% move by the yuan, but it isn't such a big deal. China has a huge balance of payments surplus, and the yuan should move a lot if it's to be meaningful. The reason it hasn't moved is that it's still pegged to the dollar.
In recent weeks, we've seen China diversify away from US dollar assets into Asian bonds. Is this the start of a trend?
No, the monthly treasury data is wrong: it doesn't check on the source of the original buyer. What we're seeing is an apparent decline in Chinese purchases and a gigantic increase in British purchases. All that's happening is that China's investment body for bonds is routing purchases through its British office — essentially to hide it to avert political criticism at home.
In recent times, there have been fears of a bubble in the Chinese economy. How bad are the imbalances, and will it all end?
People can call it what they want, but it's not a bubble like the American bubble in housing in 2007. China has a mixed economy, where bubbles are (usually) created and propped administratively. You're going to see a Chinese version of a bust in real estate, and it's going to cut into China's GDP growth, but they won't report it. They under-reported GDP growth in 2006 and they will over-report it in 2011. You won't see a crash — or even just evidence of a crash — because they will hide it.
