Archive for the Category China


Skeptical of the China data skeptics

The problem with answering comments is that one has to swat down one conspiracy theory after.  One recurring theme is that the China GDP data is fake. People breathlessly report obscure data on electricity production or rail shipments. I don’t doubt that the Chinese data is flawed, but there’s no reason to assume it’s not broadly correct.  You need to look at the big picture, and with China I mean really big.

1.  The quarter-to-quarter data is strangely smooth (although that’s partly an artifact of their use of year over year, rather than quarterly data.)  But over the business cycle RGDP growth varies as much as in the US, indeed even more.

2.  People forget that until recently China had 10% trend growth, so when it goes from 14% to 7%, that’s a big slowdown.  People also forget that some sectors of the Chinese economy are probably growing smoothly.  Health care, college education, subways rides (which are constrained by capacity), etc.  So if the overall RGDP growth rate slows from 14% to 7%, and some sectors are growing smoothly at 10%, then the cyclical sectors are slowing extremely rapidly.  And the cyclical sectors are also the commodity intensive sectors.  You could easily see lots of industry data that seems inconsistent with a 7% RGDP growth rate, during a cyclical slowdown.

3.  People sometimes argue that the trend rate has not been 10% in recent decades, but more like 7% or 8%.  The problem with these conspiracy theories is that China’s just too big and open to world trade to cook the books in that way. That’s because over the period since 1980, that kind of cheating would lead to China’s RGDP being overstated by a factor of 2 or 3.  China would now be far poorer than claimed.  (Having said that, trend growth is slowing, and will probably be 5% to 6% over the next decade.)

4.  The World Bank has China’s RGDP/person in PPP terms at 72.7% of Mexico, which seems about right to me (I’ve visited many areas of both countries.) By comparison, India’s at 33% of Mexico.  Does anyone think China’s even close to India?  Yes, China has poor rural areas, probably more than Mexico.  But some rural areas (like the highly populated Yangtze delta) are much richer than you’d think.

5.  These theories would also require cheating on all the sectoral data.  But trade data is two sided, and other countries also report soaring Chinese exports since 1980.  Chinese consumers buy 20 million cars per year, vs. 1 million in Mexico. And yet the poorer China has only 11 or 12 times Mexico’s population. India, with almost as many people as China, has a market of less than 3 million cars/year. That’s just cars, but take any appliance you wish and China looks at least as rich as the data shows, at least in terms of purchasing power.

6.  Maybe the auto figures are also faked.  Maybe VW and GM and all the other western car companies making cars in China are in on the conspiracy.  Maybe the Australian mining firms that claim to sell a God-awful amount of iron ore to China are also faking the data, as are the auto parts suppliers.  Maybe China’s not the world’s biggest exporter, not the world’s biggest carbon emitter.

Screen Shot 2015-08-30 at 10.01.26 AM

7.  Or maybe China really is 72.7% as rich as Mexico. Look at Chinese wages.  They only passed the Philippines in 2000, and are now more than 4 times higher.  They passed Indonesia in 2003, and are now twice as high.  And those two countries have been growing at about 5%/year.  Indeed I find that graph hard to believe, given how much richer Malaysia is than China:

Screen Shot 2015-08-30 at 3.25.41 PM

(OK, the previous picture is Beijing, so here’s a pic from Guangxi, one of China’s poorest regions):

Screen Shot 2015-08-30 at 10.17.38 AMAnd the next picture is from China’s absolutely poorest province, Guizhou.

(The article I found this picture in says this province is becoming a center of “big data.”  Would that happen in Chiapas?):Screen Shot 2015-08-30 at 10.38.04 AM

Back to the countryside, once again

Tyler Cowen recently linked to this story in The Guardian, and wondered whether it was an indication of a Chinese recession:

China’s Workers Abandon the City as Beijing Faces an Economic Storm 

Labour disputes are rising and some workers are leaving for the country amid fears a crashing economy could cause political and social unrest

Liu Weiqin swapped rural poverty for life on the dusty fringes of China’s capital eight years ago hoping – like millions of other migrants – for a better future.

On Thursday she will board a bus with her two young children and abandon her adopted home.

“There’s no business,” complained the 36-year-old, who built a thriving junkyard in this dilapidated recycling village only to watch it crumble this year as plummeting scrap prices bankrupted her family.

And here’s The Guardian in May 2009, a year when China experienced 9.2% real GDP growth:

Unemployment forces Chinese migrants back to the countryside

Factory to farm: millions who had enjoyed a taste of city freedom are returning to their villages

Until a week ago, Liu Xiao was part of the Pearl river delta’s army: one of the thousands of workers streaming along a Shenzhen road, gulping down breakfast, texting, lighting a final cigarette, teasing friends and swapping gossip – rushing rushing rushing to the factory for another shift making bras, computers and plastic toys for the world.

Today she waits patiently at the railway station across town. This region was the motor of China’s economic boom, but plummeting exports have forced it to slow and millions of those who kept it running have given up and gone home. Liu Xiao is one of the latest to return to the countryside: in her case to a village of just 200 people a 10-hour ride – and a world away – from Shenzhen.

So will 2015 be a repeat of 2009?  Not entirely, the trend rate of growth in China is now lower, and the risks of recession really are higher than in 2009.  But the similarity of these two articles should provide a cautionary note.  Adam Smith said, “there is a great deal of ruin in a nation”, and there are very few countries where that aphorism is more apt than China.

PS.  Here is an excellent article on the situation in China.  It points out that the Chinese government is tightening monetary policy to stabilize the yuan.  That’s not the right move at a time like this.

PPS.  This is a really good article on why Chinese stock market regulation is so inept.

PPPS.  This article suggests that as of August 25, 2015, the consensus forecast of economists is that China will have 6.9% growth this year and 6.7% next year.  That makes Tyler and I China bears, as we both expect less growth than the consensus. For some reason it makes me feel better to be on the same side as Tyler.  (I forecast about 6% going forward, and Tyler expects a very bad recession.)  Willem Buiter forecasts, 4% on official figures, in reality even less.  He says it will drag the world into a mild recession.

August 25, 2015

The main downside risk to the economy in the short term is that high volatility in the stock markets could translate into turmoil in the financial sector. On the other hand, a sooner-than-anticipated recovery in real estate and further action from authorities could spur growth in the next months. Panelists maintained their GDP projections for 2015 at the previous month’s 6.9%. Next year, the panel foresees growth at 6.7%.

But if China’s growth goes negative, I don’t think Tyler will let me get away with “I predicted less growth than the consensus, and I was right!!”

HT:  Marcus Nunes

Chinese house price bleg

People are always talking about the Chinese house price bubble.  And I have to admit that it was also my impression that Chinese house prices had risen dramatically in recent years.  I was curious to see just how much and checked The Economist’s handy interactive graph.   And I was completely shocked by what I found:

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Yes, this is house prices adjusted for changes in income, but still . . . The ratio of Chinese house prices to income has fallen from 130 in 2000 to 50 today?

I showed 4 other countries for comparison purposes, and they all seemed to be about what I’d expect.  But China?


1.  Is the data in The Economist wrong?  And if so, where can I get the correct data?

2.  If it’s accurate, does this mean China never had the house price bubble that everyone is talking about?

What am I missing here?

PS.  In nominal terms the Chinese prices look more impressive, but considering how much China’s boomed since 2000, I even find the nominal increase to be quite underwhelming—somewhere between the US and the UK.  And don’t mention specific cities, I only care about the overall Chinese housing market, not individual cities.

Screen Shot 2015-08-27 at 11.46.55 AMPS  I have a new post at Econlog.

Some extremely misleading stock market data

Here are the performances of some of the major stock markets over the past year (actually since August 27, 2014):

China (Shanghai):  2209.47 –> 2964.97  Up 34.2%

Japan:  15534.82 –> 17806.70   Up 14.6%

Germany:   9569.71 –> 10,074.66  Up 5.3%

S&P 500:  2000.12 –> 1932.34   Down 3.4%

Hong Kong:  24,918.75 –> 21,404.96  Down 14.1%

Update:  This post was written before the late day selloff.

Regarding the China numbers, I am reminded of the news report, “man drowns in lake that has an average depth of 3 feet.”  But I still think there is some food for thought here.

The Japanese and German numbers are affected by their recent currency depreciation. But Hong Kong is pegged to the dollar, while China has only depreciated about 4%.  I find those numbers to be kind of surprising.  For instance, the Hong Kong market has recently tracked China fairly closely, but has fallen by a smaller percentage.  Today it actually rose slightly, while China fell another 7%. But over 12 months Hong Kong has done far worse.  Why?

Tyler Cowen says he believes “China is in for a very bad recession.”  That’s certainly possible, and the recent data out of China is certainly consistent with that claim.  But the recent data out of China is also consistent with the claim that they will not have any recession, indeed they’ll have strong growth by the standards of almost any country other than China.

Suppose the Chinese stock market had not fallen from about 5000 to about 3000. Suppose it had fallen from about 6000 to about 2000.  That is, suppose that instead of losing a bit over 40% of its value, the Chinese stock market had lost two thirds of its value.  And suppose that while this was occurring all the production data out of China was looking horrific. Suppose international trade was in free fall, and the global financial system was imploding.

Actually you don’t have to suppose, that’s what things looked like in China at the beginning of 2009.  And China’s actual GDP growth rate in 2009?


Now of course that was below trend growth, and China’s trend rate has slowed considerably in recent years, as almost everyone expected.

My guess is that there is a 20% chance that Tyler is right, and an 80% chance that 2015-16 will be another 2009, with China growing at below trend, but enough to avoid recession.

Unfortunately we lack a China RGDP growth prediction market.  That would tell us whether I got my probabilities right.  (Of course the actual outcome won’t tell us, unless we make many repeated predictions, and look at many different outcomes.)

There is one other odd thing worth mentioning.  Let’s suppose that China is in a recession, or clearly entering one.  In that case why would the Chinese market be 34% higher than a year ago, when most experts did not forecast a recession?  But there’s a good counterargument to this. The Chinese market has always seemed disengaged from the Chinese economy, often doing very poorly when RGDP boomed.  So this would be nothing new.  Bottom line, the Chinese market tells little about their macroeconomy, and if it is telling us something, it’s not clear if we should look at 3 month or 12 returns. Or maybe the Hong Kong market is the best indicator of China, as the mainland market is distorted by government intervention. Given this uncertainty, I’d recommend focusing more on the Chinese macro data, with the caveat that that data also looked horrible in early 2009, and the economy still did pretty well.  We should probably have an answer by mid-January, when the Q4 data comes in.

Over at Econlog I have another post on the Chinese stock market, comparing it to 1987.



Bob Murphy is too kind, suggesting in a new post that today’s events provide vindication for my views.  It’s true that I’ve been saying for some time now that the Fed should not raise rates, and that this is now becoming the conventional wisdom.  It’s true that I’ve been saying that low interest rates and low inflation are the new normal of the 21st century, and the bond market is coming around to that view as well.  But Bob is really being too kind, singling out a promise that was not at all difficult to fulfill.  He quotes this non-prediction from 9 days ago:

I’m a bit more optimistic [about the Chinese economy], as I think the reform process will continue. They’ll avoid the middle-income trap. But they haven’t yet even reached the trap—a lot more growth is ahead. If you want to know when that day of reckoning will finally arrive in China, don’t come here looking for answers. I will miss the collapse, blinded by the EMH, just as I missed every other dramatic economic shock in my entire lifetime. My predictions are boring, and always the same:

“More of the same ahead”

My predictions are usually right, but they get no respect, and don’t deserve any.

Yes, my claim that my Chinese predictions deserve no respect has clearly been vindicated.  It’s easy to claim that asset prices follow a random walk and can’t be predicted; even a kindergartner could do so.  Let me return the favor with a few comments on the bubble-mongers of the world, both real and phony:

1.  If you are real bubble-monger and predicted the Chinese stock market collapse and shorted the Hong Kong market and got rich, then I offer you my congratulations.

2.  If (like me) you failed to predict the collapse, then I offer you my sympathy.

3.  If you are a phony bubble-monger who predicted the China crash, but did not get rich shorting the Hong Kong market, then I have contempt for you.

I think that pretty much covers all the bases.

PS.  Unfortunately in this day and age I must add on a “just kidding” disclaimer.  (Jokes are no laughing matter.)  I actually have contempt for no one and sympathy for everyone.

PPS.  The views of Ben Bernanke pre-Fed were very different from the actions of the Fed under his leadership.  The views of Janet Yellen pre-Fed were very different from the actions of the Fed under her leadership.  I have no idea what Larry Summer’s actions would be if he were currently chair of the Fed.

PPPS.  A brief comment on TIPS spreads.  There is one factor that leads TIPS spreads to underestimate inflation expectations—conventional bonds have more liquidity, and this reduces their yield relative to TIPS.  There are two factors that lead to the TIPS spreads overestimating inflation expectations, the fact that they are indexed to the CPI and not the Fed’s preferred PCE, and the fact that TIPS bond principal only indexes upward over the life of the bond, not downward (during deflation).

PPPPS.  I have a new Econlog post.

PPPPPS.  My claim about not having contempt for anyone is only true about 1% of the time, when I reach Robin Hanson/Scott Alexander/Scott Aaronson/Tyler Cowen/Bryan Caplan/Razib Khan/Miles Kimball levels of dispassionateness.  The other 99% of the time I’m closer to Donald Trump, and hate almost everyone.  But I was in a good mood when I wrote the first PS.