How about that Chinese economy?

I have written fairly often about China’s economy in the past:

I could continue to add prior posts, but let’s get on with today’s message. The American stock indices dropped precipitously last week because China sneezed – sounds like a syndrome. Let’s add a dose of reality to the equation. As I add the “dose of reality” it is important to remember that the Chinese economy remains mostly opaque, even to experts. However, I found this expose to be reasonable and “comforting.”

[Source: 5 myths about China’s economy, by Eswar S. Prasad]

Myth 1: China’s stock market losses reflect an ailing economy.

The dramatic declines in the Shanghai Composite Index this past week were linked to a report that the manufacturing sector is contracting and to broader concerns about China’s economy.

But while China’s growth has indeed slowed, the country’s stock markets don’t say much about the overall health of its economy. The total value of all stocks traded on the Chinese exchanges amounts to only around one-third of its GDP (compared with 100 percent or higher in advanced economies such as the United States). Most of the traded stocks represent firms in the manufacturing and construction industries, which have certainly hit a rough patch. But the services sector, household income and consumption are holding up fairly well…

Myth 2: China’s economic growth is driven primarily by cheap exports.

When Americans think of China, they may think of cheap consumer goods made by low-wage workers. The U.S. trade deficit with China continues to rise and is likely to top $350 billion for 2015, an all-time high. “China is killing us,” Donald Trump likes to say.

But the value of exports from China is diminished by how much it imports in raw materials and intermediate goods. For instance, researchers found that only about 4 percent of the value of a “Made in China” iPhone is attributable to Chinese manufacturers. Components imported by China from countries such as Germany, Japan and South Korea account for most of the phone’s value. Net exports — exports minus imports — have made only a modest contribution to China’s growth over the past decade.

The main economic driver has been investment in physical capital, including factories and infrastructure such as roads and railways. Such investment has accounted for more than half of China’s growth in the past decade… (However, be sure to read this previous post – RF.)

Myth 3: China is actively manipulating its currency.

Complaints about China’s currency gaming are common among American lawmakers (from both sides of the aisle – RF)... Except that this recent fusillade from Capitol Hill was prompted by China doing exactly what the United States has been asking it to do: ease up on management of the renminbi’s exchange rate, relative to other currencies, so that its value can be more freely determined by market forces. What the United States didn’t anticipate was that Beijing would cleverly do this when it was convenient for China but not for its trading partners. Rather than changing its policy at a time when the renminbi might appreciate, which would hurt China’s exports by making them more expensive, the government picked a time when market forces were pushing the currency downward (clever, these Chinese – RF), which helps China’s exports… Since August, China’s central bank has been intervening in foreign exchange markets — but to keep the renminbi’s value from falling too much, not to keep it from rising too fast.

Myth 4: China cooks the books to make its economy look stronger.

Many analysts consider China’s GDP growth statistics to be purely figments of official imagination. As Tim Worstall wrote for Forbes, “Informed observers don’t believe a word about what we’re being told.” Reported GDP growth is usually suspiciously close to official growth targets. And although China’s official growth rate is 7 percent, some Western economists estimate it at 3 percent or less.

There are many legitimate questions about China’s GDP growth data measured from quarter to quarter. Recent figures on electricity consumption, freight volumes and bank lending all point to much weaker growth than the composite data suggests. Over longer periods, however, the growth data is probably a more reasonable representation of what is happening in the economy and lines up with other indicators such as household income and spending.

(Some food for thought: Most of the major world economies are growing at less than 4% per year. Indeed, many are growing less than 2%. A recession is defined as “a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters – i.e., two negative quarters.” Therefore, the US economy only would need to decline by about 2.5% for the next two quarters for our economy too be “in recession.” The Chinese economy dropped 4% this year and is down about 7% to 8% from it’s highs (it was showing 12% growth less than 10 years ago). It’s not a textbook definition of a recession, but in practical terms it is a daunting decline – RF.)

Myth 5: The renminbi’s new status threatens the dollar’s dominance.

In November, the International Monetary Fund announced that it would recognize the renminbi as an official reserve currency. The move compounded fears that, as reported by Britain’s Telegraph, “US economic dominance [is] at an end as China’s currency rises.”

Not quite. China’s renminbi has certainly become an important international currency. About a quarter of China’s trade is now priced and settled in renminbi, and the IMF estimates that about 1 percent of global foreign exchange reserves are held in renminbi-denominated assets… However, the U.S. dollar still accounts for nearly two-thirds of global foreign exchange reserves, a share that has in fact increased slightly since the financial crisis.

Well… that’s all I “got,” as the saying goes. Feel better?

Roy Filly




About Roy Filly

Please read my first blog in which I describe myself and my goals.
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