China's Growth Much Worse Than Reported, What About the US?

-edited

China doubles value of infrastructure project approvals to stave off economic slowdown amid trade war.

The South China Morning Post reports China Doubles Value of Infrastructure Project Approvals to Stave Off Slowdown.

The National Development and Reform Commission (NDRC) has approved 21 projects, worth at least 764.3 billion yuan (US$107.8 billion), according to South China Morning Post calculations based on the state planner’s approval statements released between January and October this year.

The amount is more than double the size of last year’s 374.3 billion yuan (US$52.8 billion) in approvals recorded over the same period, which included 11 projects such as railways, roads and airports.

Local governments have been under increasing pressure from Beijing to support the economy, but they have less budget room due to lower tax revenues after the central government over the past year ordered individual and business tax cuts.

To fill the gap, Beijing has allowing local governments to sell more special purpose bonds, whose proceeds can only be used to fund infrastructure projects. At the beginning of this year, the Ministry of Finance raised the quota for special bonds to 2.15 trillion (US$302 billion) from 1.35 trillion (US$190 billion) last year. And when local governments came close to exhausting their annual quota set this autumn, the central government brought forward a portion of their 2020 quota so they could continue to raise funding for new projects.

Infrastructure Urgency

Michael Pettis, Finance Professor, Peking University, and author of the China Financial Markets website has an interesting take infrastructure projects.

Allocation of Money

To fund the projects China Cuts Banks' Reserve Ratios, Frees up $126 Billion for Loans.

Analysts had expected China to announce more policy easing measures soon as the world’s second-largest economy comes under growing pressure from escalating U.S. tariffs and sluggish domestic demand.

The People’s Bank of China (PBOC) said it would cut the reserve requirement ratio (RRR) by 50 basis points (bps) for all banks, with an additional 100 bps cut for qualified city commercial banks. The RRR for large banks will be lowered to 13.0%. The PBOC has now slashed the ratio seven times since early 2018. The size of the latest move was at the upper end of market expectations, and the amount of funds released will be the largest so far in the current easing cycle.

The broad-based cut, which will release 800 billion yuan in liquidity, is effective Sept. 16. The additional targeted cut will release 100 billion yuan, in two phases effective Oct. 15 and Nov. 15.

Real Growth

Trade Agreement

Chinese Local Government Funds Run Out of Projects to Back

On October 16, the Fiancial Times reported Chinese Local Government Funds Run Out of Projects to Back.

There are not many economically viable projects for us to take on,” an official at Sichuan Development told the FT. “We have plenty of bridges and roads already.

GDP Formula

GDP = C + I + G + (X – M)

GDP = private consumption + gross investment + government investment + government spending + (exports – imports).

Whether or not the projects are viable, government spending adds to nominal GDP.

If the government paid people to spit at the moon it would add to GDP.

Arguably, that's a far better use than dropping bombs and making enemies in the process.

Not Writing Down Losses

​China isn't writing down losses, but neither is the US, EU, or any other country.

With that in mind How Badly Overstated is Chinese and US GDP?

Concern over GDP with no concern over losses and malinvestment is concern over nonsense.

Mike "Mish" Shedlock

Comments (36)
No. 1-14
Casual_Observer
Casual_Observer

You get what you measure. True growth can only be measured by productivity growth which is at the crux of a rise in the standard of living. This number has been at or below 2% for 20 years in the US.

Realist
Realist

Growth rates are on a long-term downward trajectory as virtually all countries attempt to keep things growing. Casual and I agree on roughly 1% average over the next decade. After that expect zero overall growth.

Realist
Realist

Slogflation.

Latkes
Latkes

I have seen this "China's growth is much less than reported" for more than a decade now. Meanwhile, they have built several brand new cities and lifted millions out of poverty. They somehow stole all western manufacturing ... but their growth is fake?

I am not saying that China's official numbers can be taken at face value (most likely not), but I wouldn't put much trust into western expert estimates of China's growth either.

thimk
thimk

a somewhat relevant factoid :

caradoc-again
caradoc-again

If the infrastructure is finally utilised then it is investment and the future growth as a consequent real. May not be efficient capital allocation but real investment for future growth.

Questions are - how much will be utilised (to what %), when?

Low utilisation a long way off then it's all smoke and mirrors. At least they will be busy maintaining it until it can find users.

The apartment sector is a worry as they are often used as investments by ordinary Chinese. If prices collapse there will be a big negative wealth impact just as China is trying to wean itself off exports to the US. You can imagine the rest.

JonSellers
JonSellers

"Concern over GDP with no concern over losses and malinvestment is concern over nonsense."

China is not a true capitalist country. If I borrow money to build a housing development that no one wants to live in, then it is a disaster for me when I declare bankruptcy, and a disaster for the bank that lent me the money, because it is out the money.

In China, the government will just print the money and put it in the bank. I have no losses and neither does the bank. But the money I spent is to build the development is now in the pockets of the people who did the work. And they now have money to feed their families, pay rent, save for the future, whatever.

That's the Chinese model. It is NOT private sector capitalism. It is a growth machine for the sake of employing people and putting cash in their pockets. It will end when the world can no longer provide enough raw materials to keep growing.

thimk
thimk

I agree GDP is goosed by a number of "non organic" activities. but assuming that we all wrote down our losses how would that loss flow through to final GDP print ?

njbr
njbr

Accompany JonSellars comments with consideration of the GDP with "no concern over losses and malinvestment" with respect to such fine US operations of places like WeWork, Netflix (26 years without turning a profit !), stock buybacks, oil shale debacle, etc, etc...

Pot meet kettle...

KidHorn
KidHorn

The best use of government money is on infrastructure improvements and basic research. Otherwise, there's little to nothing to show for it. The biggest government expense in the US is entitlements. Free money from the government. At least in China the citizens have to work for the government money.

Casual_Observer
Casual_Observer

As a citizen the growth rate matters less than the immigration issue. I actually found it easier to find a job under Trump than Obama because employers are more reluctant to hire h1b and are looking to hire citizens and green card holders first again. My friends who were replaced by h1b holders now have multiple jobs and are getting rich under Trump. And these are all second generation immigrants with engineering degrees who suffered during the 2001 and 2009 crises.

Carl_R
Carl_R

I'm puzzled by the comment "​China isn't writing down losses, but neither is the US, EU, or any other country.". In the US, if a business undertakes an investment, and it fails, they do write it off. On the other hand, if, in the US, a governmental entity undertakes an infrastructure project, so far as I know they expense it as they build it, and never "write it on" as an asset, so there is nothing to write off, regardless of whether the infrastructure turns out to be useful.

Webej
Webej

At least the money is being spent on real things instead of just bidding up speculative assets or paying for a medical racket. The Chinese are consciously importing as much technology, knowledge, and resources as they can. They figure they can sort out which techniques work best later. If there is not enough money or the game stops at a certain point, they are a lot better off than 40 years ago. Better off insolvent with a lot of technology, infrastructure, and extra housing than solvent without it.

Andy Huang
Andy Huang

China is brilliant. Spend its money on its own people and its own infrastructure. The United States, print money like China, give it to banks, which then hand it over to the Jews. And further direct subsidy to their country in the Middle East.