Is China's Economic Growth Real?
The following points appear frequently in mainstream media commentary on China:
- China’s economy is growing at a rate of 8% annually, perhaps higher
- The Communist party will not “allow” growth to slow because it would create social unrest
- China’s development is based on the “export-lead-growth model”
- The export-lead model has been successful in “creating jobs” but due the collapse in Western consumer demand for their manufactured goods, this model may no longer be working.
- Many Western economists believe that the savings rate is “too high” and that the Communist party should adopt more policies to promote consumption, which will help them transition to a more “consumption-lead growth model”.
Some questions I have about the Chinese growth story:
- The economy is still largely centrally planned. A significant percentage of the large industry is still state-owned. How can central planners overcome Mises’ problem of economic calculation? It is likely that a large amount of the savings is simply wasted on projects that are not economically rational if the costs were properly accounted for (not hidden by their currency peg).
While the savings rate of Chinese is very high, most of the investments are probably wasted because bank loans are largely politically, not economically, driven.
See for example, this Daily Bell column; an article in James Grant’s most recent Interest Rate Observer (paid content) calledChina Channels Monkeybrains; and Brad Setser’s paper on the Chinese banking system.
Grant explains that the banking system uses Soviet-style planning based on gross volume lending targets. Setser describes how the banking system in the past enormous quantities of of bad debts, which were taken off their books by the central planners.
- GDP measurement can be misleading or event irrelevant. Measuring growth GDP is like looking at the cash flow of a company while ignoring the balance sheet. Producing tons of physical stuff is not the same thing as economic growth if it costs more to produce things than they can be sold for. Also, GDP can increase during a credit-driven boom because the measurement of GDP has no way of distinguishing between mal-investments and economically sound investments.
- Why do media commentators think that the currency peg is such a brilliant move? Ultimately the goal of production is consumption; exports can only be paid for with imports. The currency peg only distorts their cost structure of Chinese firms, making their costs appear in local currency lower. The cost of the currency peg is paid by the Chinese people as a whole through a lower purchasing power of money. These artificial costs encourage firms in some industries to produce goods for export to the US market that Americans cannot afford. To maintain the peg, the Bank of China was required to accumulate dollars which they then loaned back to the US government, Fannie, and Freddie. As these loans will surely default (either through inflation or outright default) it will become clear many Chinese people worked hard and saved to give away a lot of valuable goods for free. The entire strategy is a massive wealth transfer scheme from Chinese savers to American consumers and the US government. This is not a “growth strategy” at all, it is an impoverishment strategy.
Along with “create jobs”, the phrase “export-driven growth” should be stricken from economic journalism. This phrase is so pernicious because it looks like a simple noun modified by an adjective, but it hides a false theory of cause and effect. How much sense does it make to talk about a “beer-driven safe driving strategy” or a “partying and drug using high academic performance strategy”. Putting words together in a sequence does not mean that cause and effect really work that way.
A mercantilist policy of subsidizing export industries does not make a country more prosperous. Economic growth can only mean an increase in the ability of an economic system to produce more consumption goods. In the global economy, the system is the entire world, with each nation contributing some portion of a single integrated capital structure. Producing a lot of capital goods – factories, shipping terminals, etc. — does not necessarily contribute to economic growth if the physical stuff is not economic capital. Economic capital means that it is integrated into the global structure of production through economic calculation.
The purpose of exporting is not to create more factories per se, nor is it to “create jobs”. The purpose of production is for the producers, is is to gain the ability to afford to purchase more goods — either capital goods or consumption goods. Producing things at a loss consumes capital and makes the producer poorer.
Nor is there such a thing as consumer-driven economic growth. Consumption is the result of economic growth — savings and investment drives it. The idea that a country can “switch” from “export-driven growth” to “consumer-driven growth” ignores the specific and heterogeneous nature of capital. The fact that people are talking about this so much only indicates that a lot of the physical infrastructure in China is not economic capital. If the existing capital structure in China was to be used to create a different mix of goods – say low-end consumer goods for Chinese consumers with lower incomes than Western consumers — then the values of these factories under economic calculation would be marked down considerably, in many cases below their costs.