CHINAMacroReporter

Is China's Economic Power a Paper Tiger?

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.
by

|

The National Interest

November 27, 2017
Is China's Economic Power a Paper Tiger?
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.

More

CHINAMacroReporter

February 8, 2021
Why the Anglosphere sees eye to eye on China
‘Some of America’s European allies are very wary of what they fear will be a new cold war with China. By contrast, the US is getting more support from the UK, Australia and Canada.’
keep reading
February 7, 2021
' "Longer Telegram" | To Counter China’s Rise, the U.S. Should Focus on Xi'
A strategy that focuses more narrowly on Xi, rather than the CCP as a whole, presents a more achievable objective.'
keep reading
February 7, 2021
'The Sources of Soviet Conduct'
'The main element of any United States policy toward the Soviet Union must be that of a long-term, patient but firm and vigilant containment of Russian expansive tendencies.’
keep reading
May 7, 2021
'Another China-Related Risk for Investors & Corporations: Taiwan'
"Taiwan poses the biggest geopolitical risk in Asia and is likely to only increase, a reason it has to be built into investors’ [and corporates' models]" according to Arthur Kroeber, head of research at Gavekal.
keep reading
May 5, 2021
'Western companies in China succumb to Stockholm syndrome'
‘Senator Marco Rubio of Florida has a point when he calls Delta Air Lines “the height of hypocrisy” for opposing voter legislation in the US state of Georgia while partnering with a government he accuses of being “actively engaged in genocide” in Xinjiang.’
keep reading
May 4, 2021
'The Surprising Strength of Chinese-Japanese Ties'
At their summit in April, ‘after years of veiled messaging Japanese Prime Minister Yoshihide Suga U.S. President Joe Biden, ‘formally acknowledged that they are working together to deter China’s military power in Asia and compete with China economically.’
keep reading
May 3, 2021
'How Will the Digital Renminbi Change China?'
‘China's new digital renminbi by itself will not help the currency to challenge the US dollar’s global dominance.’ ‘Its true significance instead lies in its potential to shift the competitive balance of power between the country’s technology giants and traditional banks.’
keep reading
May 2, 2021
'Fanning the Flames of War'
I recently received an email from a former U.S. ambassador and influential senior foreign policy expert taking me to task for publishing so many hawkish posts about U.S. policy toward China in the ‘China Macro Reporter.’ These are, he said, ‘in some ways fanning the flames of a potential war. Please back down, at least a bit.’ ‘This is not the Malcolm I remember or know,’ he ended.
keep reading
May 2, 2021
‘A trend for hostility toward China, inflamed under Trump, is a recipe for American failure’
‘A trend for hostility toward China, inflamed under Trump, is a recipe for American failure.’ ‘Hostility toward China, much of it misinformed historically and strategically, has deepened in the United States in recent years, with a consensus hardening among both Republicans and Democrats that China is at root an adversary that must be thwarted.’ ‘Four years under President Donald Trump have enlarged and inflamed that trend, but it is a recipe for American failure.’ ‘The Joe Biden administration needs to seriously rethink Washington’s approach to Beijing.’
keep reading
April 30, 2021
'World Economic Outlook, April 2021: Managing Divergent Recoveries'
‘The upgrades in global growth for 2021 and 2022 are mainly due to upgrades for advanced economies, particularly to a sizeable upgrade for the United States (1.3 percentage points) that is expected to grow at 6.4 percent this year.
keep reading
April 29, 2021
Biden China Policy: What We Know at the 100 Day Mark
Friday, April 30, marks 100 days of the Biden Presidency.On Thursday, President Biden gave a speech to a Joint Session of Congress that summed up many of policies – including those on China - as he nears the 100-day mark.And several major media outlets and think tanks are getting an early start on their analyses.Here's Senator Lindsey Graham: "I'm not very impressed with the first 100 days.”‘ "He's been a disaster on foreign policy.” ’‘ “Russia and China are already pushing him around, so I'm very worried." ’
keep reading
April 29, 2021
'Biden’s First 100 Days: Setting the Table for U.S.-China Strategic Competition'
‘Biden is focused on accumulating as much leverage as possible to deal with China from a position of strength and to dispel the growing Chinese perception that the United States is a power in decline.’
keep reading
April 29, 2021
'What Joe Biden Said About China in His First Speech to Joint Session of Congress'
“We’re in competition with China and other countries to win the 21st Century.”
keep reading
April 29, 2021
'Biden's Speech Calls for U.S. to Take On China and Russia'
‘President Biden justified his broad vision to remake the American economy as the necessary step to survive long-run competition with China
keep reading
April 29, 2021
'What does Biden’s first 100 days tell us about his approach to China?'
‘What we have learned from the first 100 days is that we are likely to have both a confrontational and competitive relationship with China, similar to Trump’s policy but with some important nuances.’
keep reading
April 29, 2021
'China's Response to Biden's Speech'
‘It is natural for the two sides to have competition in some fields, but we should advocate fair competition, like competing with each other for excellence in a racing field, not beating each other on a wrestling arena.’
keep reading
April 26, 2021
'The New Age of Autarky'
‘The United States, China, and India are each now engaged in what seems like a paradoxical enterprise: the quest to increase their global status while also turning inward to become more self-sufficient.’
keep reading
April 26, 2021
'China Inside Out: A Conversation with Susan Shirk & Tony Saich'
‘The centralization of power, quite predictably, leads to this kind of echo chamber effect, which is really quite dangerous. And it's something that we should be factoring in when we think about how to deal with China now.’
keep reading
April 24, 2021
'Xinhua News Agency on the "Strategic Competition Act of 2021" in the U.S.' | 新华社评美“2021年战略竞争法案”
‘The bill is full of Cold War mentality and ideological prejudice, wantonly misinterpreting, slandering and discrediting China's development strategy and domestic and foreign policies, and grossly interfering in China's internal affairs.’
keep reading
April 23, 2021
'A new era of bipartisanship on China in Congress?
‘The Strategic Competition Act codifies a bipartisan U.S. position on a range of China-related issues and telegraphs to U.S. allies the federal government is unified.’
keep reading
April 23, 2021
'Xi at the Climate Summit: Domestic Obstacles to Carbon Neutrality'
‘Xi’s reticence at the summit could be driven by domestic considerations. He needs to balance divergent interests between domestic industrial groups and international expectations, the need to show China’s green image and also not be seen as caving to U.S. diplomatic pressure.’
keep reading
April 21, 2021
‘Scenario One & Two: Xi Steps Down'
‘In this scenario, Xi thwarts the current consensus by handing over his leadership positions to at least one individual from the current Politburo Standing Committee (as per existing regulations).’
keep reading
April 21, 2021
'Threat of Chinese sanctions tests Japan's resolve on Taiwan'
"We advise Japan to stay away from the Taiwan question. The deeper it is embroiled in, the bigger the price it will pay." Communist Party-backed Global Times' editorial.
keep reading
April 21, 2021
‘Scenario Four: Unexpected Death or Incapacitation'
‘Even if the CCP’s claim that Xi Jinping has no designs to remain in office for life is true, his evisceration of succession norms leaves the country ill-prepared for his sudden death or incapacitation.’
keep reading
April 21, 2021
‘Scenario Three: Leadership Challenge or Coup
‘By removing de jure term limits on the office of the presidency — and thus far refusing to nominate his successor for this and his other leadership positions — Xi has solidified his own authority at the expense of the most important political reform of the last four decades: the regular and peaceful transfer of power.’
keep reading
April 20, 2021
'Xi calls for new world order (again)'
‘We must not let the rules set by one or a few countries be imposed on others, or allow unilateralism pursued by certain countries [read America] to set the pace for the whole world.’
keep reading
April 20, 2021
'Beijing won total control of Hong Kong. Now, the "brainwashing" begins.'
April 15 was not a normal Thursday in Hong Kong. That occasion, the first “National Security Education Day” since China imposed a tough security law in June, was the most visible display of Hong Kong’s fall from a relatively free, boisterous territory to an ­Orwellian place that resembles the repressive mainland.’
keep reading
April 19, 2021
‘The US-Japan Joint Statement grossly interferes in China's domestic affairs'
‘The US-Japan Joint Leaders' Statement grossly interferes in China's domestic affairs and severely violates basic norms governing international relations. China deplores and rejects it.’
keep reading
April 19, 2021
'Tokyo Flexes Its Talons'
‘The alliance with Japan is the single most important international relationship America has.’
keep reading
April 18, 2021
'Taiwan in US-Japan statement: show of resolve or diplomatic calculus?'
"The statement shunned more specific language like 'defend Taiwan' to avoid unnecessarily provoking China."
keep reading
April 17, 2021
'Is growth in China soaring or slowing?: The answer depends on how you calculate growth'
‘It was China’s fastest growth on record, underlining the strength of its recovery. Yet it also illustrates the oddities in how GDP is reported.’
keep reading
April 17, 2021
'Margaret Ng's Statement at Conclusion of Today's Trial'
‘There is no right so precious to the people of Hong Kong as the freedom of expression and the freedom of peaceful assembly.’
keep reading
April 16, 2021
U.S.-Japan Joint Leaders’ Statement: “U.S. - JAPAN GLOBAL PARTNERSHIP FOR A NEW ERA”
‘President Biden and Prime Minister Suga exchanged views on the impact of China’s actions on peace and prosperity in the Indo-Pacific region and the world, and shared their concerns over Chinese activities that are inconsistent with the international rules-based order, including the use of economic and other forms of coercion.’
keep reading
April 16, 2021
'Breaking China’s Stranglehold on the U.S. Rare Earth Elements Supply Chain'
‘China’s control of the supply of usable, refined rare earth elements undermines U.S. security and that of its allies.’
keep reading
April 16, 2021
'China’s economy springs back from pandemic hit with record growth'
“The headline year-on-year data really doesn’t tell us the story of how the economy has performed in the first quarter . . . in fact that performance was a bit disappointing. The silver lining is that March was better than the first two months.”
keep reading
April 16, 2021
'Hong Kong Newspaper Tycoon Jimmy Lai Jailed Over Role in Peaceful Protests'
“The wrongful prosecution, conviction and sentencing of these activists underlines the Hong Kong government’s intention to eliminate all political opposition in the city,”
keep reading
April 15, 2021
'Biden’s Afghanistan Withdrawal Is a Blow for China'
‘President Joe Biden’s decision to withdraw U.S. and NATO troops from Afghanistan at the end of summer is likely to confound Chinese calculations, both economic and geopolitical.’
keep reading

Heading

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Suspendisse varius enim in eros elementum tristique. Duis cursus, mi quis viverra ornare, eros dolor interdum nulla, ut commodo diam libero vitae erat. Aenean faucibus nibh et justo cursus id rutrum lorem imperdiet. Nunc ut sem vitae risus tristique posuere.