David Stockman: China’s Real Economic Figures Are Scary

WASHINGTON – Serious international economic and business media in the past used to quote official Chinese economic statistics indicating vigorous growth followed by even higher growth without any comments. But now something has changed.

Cooking the books 

Without saying so directly, the same media imply that the Chinese Government makes up its numbers. A recent WSJ story –even though not prominently placed– pointed out that it is hard to believe that the Chinese economy really grew at a 6.9% rate when all the indicators about manufacturing, consumption, exports and imports are significantly down.

Yes, official statistics released by the Chinese Government do not add up. Or, to put it differently, if you read between the lines, the truth is that Chinese authorities routinely and willfully cook their books in order to prove that their worn out investment-led growth model still works wonders.

True enough, Beijing conceded a while back that the country is experiencing an economic slow down. But they added that it is not a major one, while the Government has everything under control.

5% or less 

Well, several economists and forecasting firms believe instead that China’s official GDP growth numbers are inflated by at least 2%, may be even more. Which is to say that the Middle Kingdom is growing, but at 5%, not at 6.9%. Besides, the slower growth numbers hide even deeper troubles, since growth is financed by massive amounts of debt.

End of an era 

So, here is the thing: the Chinese economic miracle is over. What we see now is a (semi-desperate) political leadership that is trying to keep the wheels turning via some more debt-financed growth.

The implications of China’s loss of momentum are enormous. From Australia to Brazil, from Chile to Zambia, emerging economies that were doing well because of the China-driven commodities boom are now suffering, some (like Brazil) in a major way. Likewise, Germany and others will export fewer high technology products to China.

Not under control 

The Beijing cooked up notion (bought by many in the West) that the smart and wise Communist Party planners have all under control, while they steer the country away from investment-led growth to consumer-led growth, is a fantasy. China is in deep trouble, and we should be concerned.

In-depth analysis 

For a deeper and detailed analysis of China’s real economy, and what the end of its incredible growth era means for the rest of the world, I strongly recommend that you read a piece titled “Red Swan Descending” (reproduced below) by David Stockman, (Budget Director under Ronald Reagan). He wrote this on October 20 in his Contra Corner  www.davidstockmanscontracorner.com

Red Swan Descending  (by David Stockman)

“The proverbial peddlers of Florida swampland can now move over. They can’t hold a candle to the red suzerains of Beijing.

The latter had drawn a line in the sand at 7.0% GDP growth. Conveniently enough, the “consensus” estimate of so-called street economists was pegged at 6.8% for Q3, thereby giving authorities one thin decimal point through which to thread a “beat” at 6.9%. 

By golly they did it!

Even then, China’s Ministry of Truth had to fiddle down the GDP deflator to negative 0.5% (for the second time this year) in order to hit the bull’s eye. And that’s exactly the point.

No real world $10 trillion economy plagued with all of the turmoil evident in China’s whipsawing trade data or its volatile real estate development sector or its faltering rust belt and commodity-based industries can possibly deliver absolutely stable GDP numbers to the exact decimal point quarter after quarter.

In fact, the odds that these reports represent anything other than propaganda are so overwhelmingly high that they perforce raise another more important question.  Why does Wall Street and its servile financial press not issue a loud collective guffaw when they are released?

But no, the Wall Street Journal took it all very seriously, noting both the “beat” and China’s claim that the “miss” wasn’t a miss at all:

The better-than-expected result—a Wall Street Journal survey of 13 economists forecast a median 6.8% gain—is likely to renew debate over the accuracy of China’s growth statistics…….Speaking at an event to promote entrepreneurism in Beijing on Monday, Premier Li Keqiang said “even though it was 6.9%, it is still a growth rate of around 7%.”

Right. China’s #2 communist boss is out promoting the “enterprenurial spirit” while emitting central planning propaganda to the decimal point.

You might find the irony exceptionally rich, but there is a larger message. Namely, the true size of China’s economy is unknowable to the nearest trillion or even several trillions. But that does not prevent most of Wall Street from taking seriously each and every word of China’s self-evidently clueless statist rulers spouting growth rates to the decimal point. [Bold added]

In truth, Wall Street has become so intellectually addled from its addiction to central bank enabled gambling that it no longer has a clue about what really matters. That’s why the next crash will come as an even greater surprise than the Lehman meltdown, and will be far more brutal and uncontainable, as well.

Yet the evidence that a China-led crash is on its way is hiding in plain sight. And what is being blithely ignored is not merely the blatant inconsistencies in its economic numbers—–such as the fact that electricity consumption has grown at only a 1.3% rate over the past year——or that its commerce with the outside world has shrunk drastically, with imports down by 23% and exports off by 3-6% in recent months.

Instead, the evidence that China is a slow-motion train wreck lies in the very consistency of its Beijing-cooked numbers. Apparently, no one has told its credit-happy rulers that printing precise amounts of new GDP quarter after quarter by issuing credit at double the rate of nominal income growth will eventually result in the mother of all deflationary collapses.

Stated differently, if the pattern of debt versus GDP shown below is pursued long enough, the world’s greatest open air construction site will fall silent. Everything which can be built will have been delivered; any cash flow which can be encumbered with more debt will have been levered-up; any pretense that financial institutions are solvent will have given way too soaring defaults; and the Wall Street delusion that the primitive central planners of red capitalism had an iron grip on China’s runaway expansion will have been revealed as a snare and delusion.

Accordingly, the only thing that really counted in yesterday’s release was that credit is still growing at nearly 12% or at 2X the 6.2% gain in nominal GDP. And as is also evident in the chart, this massive and aberrational debt versus income gap has been underway as far back as the eye can see.

Indeed, its goes all the way back to Mr. Deng’s moment of enlightenment 25 years ago. That’s when he discovered a printing press in the basement of the PBOC and concluded that communist party power might better be preserved by running these presses red-hot than by Mao’s failed dictum that power descends from the white-hot barrel of a gun.

In any event, why in the world would anyone in their right mind think this crucial chart can be extended toward the right axis much longer. Assume 10 more years of 12% credit growth, for example, and China will have $90 trillion of total debt or 50% more than the already staggering amount carried by the US economy. [Bold added]

At the same time and given that China’s nominal GDP growth is descending in Gartman fashion from the upper left to the lower right, assume the very best outcome for nominal income. That is, posit that somehow China manages to achieve ten more years of this quarters’ 6% nominal growth. So doing, you get a mere $17 trillion of GDP.

Everywhere and always, however, a 5X total leverage ratio on an economy is a recipe for crushing deflation. In fact, it has never happened before in modern times except for Japan after 1990; and Japan at least had some semblance of functioning markets separate from the state and the rule of commercial law, contracts and bankruptcy.

By contrast, when China fully plunges into its inexorable deflationary spiral the rulers of red capitalism will have no choice except to resort to Mao’s preferred instruments of rule—–paddy wagons and machine guns—-in order to quell an outraged citizenry. After all, Mr. Deng told China’s newly ascendant capitalists that it is glorious to be rich, but did not explain that printing press prosperity ultimately results in a crack-up boom.

Stated differently, the recent 18-month rise and then overnight collapse of $5 trillion of phony market cap in the Chinese stock market gave rise to utter panic and mindless expediency in Beijing, including a de facto bailout of billionaires. China’s red rulers apparently feared that the 90 million angry stock market speculators would be no match for its 70 million party cadres——especially since most of the latter were foremost among the former.

Yet what will happen when China’s hideously inflated real estate and land values succumb to the deflationary wringer?  And hideous is not too strong a word: in many urban areas housing prices have reached 15-30X the median income.

Well, there are 65 million drastically over-priced, empty apartments in China because its rulers told speculators and the rising middle class that housing prices could never fall——that they were the next best thing to a piggy bank. Accordingly, the last phase of China’s madcap construction boom is likely to be a manic spurt of prison building to accommodate the millions of irate citizens who are destined to experience China’s turbo-charged version of 1929. [Bold added]

The other number in the Q3 release that has been drastically misinterpreted is the reported 10.6% growth of fixed asset investment. Needless to say, this was described as “disappointing” when it is actually a screaming symptom of China’s terminally deformed economy. If it had any hope of avoiding a crash landing, fixed investment in its fantastically overbuilt public facilities and industrial capacity would be sharply negative, not still growing in double digits.

Owing to the cardinal error embodied in Wall Street’s self-serving rendition of Keynesian economics, however, China’s fatal dependence on erecting economic white elephants and what amount to public pyramids in the form of unused airports, train stations, highways and bridges, is given hardly a passing nod. That’s because it is assumed that some way or another China will make the transition to a services and consumption based economy just like the good old shop-till-they-drop US of A.

Let’s see. When China finally stops its borrowing binge, these putative shoppers will need to finance their purchases out of current incomes. Yet is not the overwhelming share of household income in China currently earned from the supply chain for fixed asset investment and construction and from the export of cheap goods to already saturated and debt-besotted DM markets? [Bold added]

Just consider the fantastical reality that China’s 2 billion ton cement industry produced more in three years than did the US industry during the entire 20th century. When they finally stop building roads, apartments and factories, therefore, it is not just the cement kilns which will shutdown, but a whole network of gravel haulers, chemical plants, cement truck fleets, construction equipment suppliers, work site service vendors and much more reaching deep into the interstices of China’s hothouse economy. [Bold added]

Likewise, when rebar and other construction steel demand collapses and the rest of the world throws up barriers to China’s surging steel exports, as it surely will and is already doing, the ricochet effects on China massively overbuilt 1.1 billion ton steel industry will be far-reaching. The incomes of coal barons and blast furnaces workers alike have already taken a pasting, and the downward spiral is just getting started.

And wait until China’s newly minted auto dealer lots become backed-up with unsold cars as far as the eye can see. Then its 25 million unit auto industry will tumble into a depression unlike anything since 1929 when Detroit’s production plunged from 6 million cars/year to less than 2 million.

All of those suddenly unemployed auto, steel, rubber, glass, upholstery etc. workers did, in fact, economically “drop”. But it wasn’t from an excess of shopping!

In short, the affliction of Keynesian economics brought many ills to the modern world, but repeal of Say’s Law was not among them. You can have a one-time credit party, but when it inevitably ends, consumption spending defaults to that which can be financed from current incomes. Consumption is the consequence of production and income, not its cause.

Yet crack-up booms eventually destroy the bloated and unsustainable incomes generated in the raw materials, capital goods and consumer durable sectors during the boom phase. Accordingly, even the red suzerains of Beijing can not get from here to there. The phantom incomes that resulted from paving nearly half of the Asian continent occupied by 20% of the world’s population must inevitably shrink, meaning that China’s consumption and service spending will falter, too.

Stated differently, China’s red capitalism is the new black swan. There is nothing rational, stable or sustainable about it. Moreover, the consequence of its pending collapse will be literally earth shattering.

That’s because in recent years it has accounted for a lot more than the one-third of global GDP growth conventionally cited. The latter is just a measure of border-to-border economic statistics.

But the second and third order effects are equally large. From the bowels of Australia’s iron ore mines to the top of Dubai’s pointless 100 story office towers, the entire warp and woof of the global economy has been distorted and bloated by the central bank money printing spree of the last two decades, led by the red credit machines of Beijing. Everywhere economies have succumbed to over-building, over-consumption, over-financialization and endless dangerous, unstable speculation.

So forget the cleanest dirty shirt meme or the preposterous Wall Street nostrum that the US economy has been “decoupled” from the rest of the world. That’s unadulterated hogwash, and its means that the stock market and risk assets are heading for a thundering crash.”




Walking in Lusaka

LUSAKA (Zambia) – I was walking in a nice area, with beautiful Jacaranda trees, now almost in full bloom, lining the streets. In this part of Lusaka you can find some of the best hotels, plus the local offices of many international organizations. The Word Bank is here, plus the International Monetary Fund, The International Finance Corporation, and the African Development Bank.

These days, one glitch is represented by frequent power cuts, due to limited production capacity caused by a persistent drought. (Zambia depends in a significant way on hydro power generation. Low water levels in the dams mean less electricity production).

As I got to a busy intersection, I realized that the traffic lights were not working, most likely
due to a power cut. This presented a real problem. Even without a functioning traffic light, cars were zipping by at high speed.

I looked around and saw a young woman in the same predicament. She was also reviewing the situation. I concluded that it would be wise to follow her lead. “She is local”, I thought. “She understands the traffic, and how drivers react to pedestrians crossing the street”. Sure enough, during a short lull in the incoming traffic, the young lady started crossing. And I followed her.

When we safely got to the other side, I looked at her and I commented that I was lucky to have had the opportunity to follow her. In reply, she said something polite.

But then, in a simple and direct way she said to me: “You know, you are the very first white person I have ever talked to in my life”. “Really?”, I commented in disbelief. “And what do you do? What is your name?”, I asked. “I work as a marketing specialist for a firm in the Cairo Road. My name is Mary”.

Mary spoke clearly, in a nice way, in very good English. I was a little confused. “How is it possible that she never interacted with any white foreigners?”, I reflected.  There are several Europeans, Americans and Asians in Lusaka. Some actually live here, some come for business, or tourism. Others work in Lusaka as diplomats, or aid workers.

Well, may be an explanation is that “globalization” is still work in progress. Below a rather thin veneer of increased connectivity, we –Africans, Europeans, American, Asians– are not yet part of “One World”. There are plenty of interactions, of course. But we have not reached critical mass.

No doubt, the process is unfolding; but we are not there yet. Well, I just hope that we can move faster.

And I am sure that as the level and quality of international connections improves open-minded people like Mary will see that this process creates new and interesting opportunities.

Strange Conversations While In Africa

LUSAKA (Zambia) – During business trips in far away places it is relatively easy to talk to strangers who are also traveling, just as you are, for business or pleasure. Sometimes the conversations are very interesting, sometimes bizarre.

Meeting Brian

It is Sunday and I went to the hotel gym to exercise. Afterwards, I saw a gentleman in the locker room. I said hello to him. There is a brief introduction. It turns out that this traveler (let’s call him “Brian”) is from the North of England, very close to Scotland. Brian is a nice, mild mannered man. He runs a bed and breakfast, and he organizes outdoors activities for children. A good guy, it seems. He is in Zambia for a wedding.

British politics

So Brian lives right next to the Scottish “Border”. Ah, Scotland, with all its political problems. “This matter of secession is by no means over”, says Brian. “Even though the referendum failed, they’ll try again”. I agreed with him on this.

But then we turned to British politics, and Brian observed that there are goods things going on in the British Labour Party. Indeed, there is a new beginning, on account of the election of Jeremy Corbyn, (a bizarre radical socialist), as party leader.

I was frankly stunned. Good things? From a party that just regressed to ancient Marxism? I politely noted that this leftist agenda has been tried, many times, in many different parts of the world, and it did not work.

In praise of Socialism

Well, Brian brushed all this aside. (Essentially, the Soviet Union, Pol pot’s Cambodia and Maoist China, among others, never happened; or were just small foot notes). He noted that many noble Marxist experiments, such as the Sandinista regime in Nicaragua, were snuffed by the evil Americans. So we shall never know what wonders those truly enlightened Socialists might have brought about.

Never mind that Daniel Ortega, the retreaded old revolutionary leader whose dream of a just society was allegedly killed by the CIA, is alive and well, (In fact, now, thanks to the wisdom of Nicaragua’s voters, Ortega is the current “democratic” leader of perennially impoverished Nicaragua. Apparently the CIA did not do such a good job.)

It failed in the past, so let’s try again

But Brian goes further. “Well, the very fact that Socialism did not work in the past is good for today”, he says, quite seriously. “We can have a fresh start, avoiding the mistakes of the past”.

In other words, according to Brian, Socialism in principle is a very good thing. The ony issue is some implementation glitches, here and there. In other words, with more refined planning and better execution these problems experienced in the past will be avoided, and the world will finally enjoy the blessings of a just society.

As I said, Brian is a pleasant person.

And yet, in a peculiar way, he is a prisoner of a crazy ideology. Think of this bizarre –and totally irrational– argument: “Precisely because Socialism failed so many times in the past, this is the moment. We have to try again”.

He said all this calmly, in a matter of fact way.

So, here we go. One century of disastrous economic failures, (not to mention killings, the Gulag, mass murder, denial of basic human rights, and more), is a pretty good indicator of future success.


It really worries me to see how blind belief in crackpot ideologies prevents otherwise normal people to see reality.

No, contrary to what the thinkers of the Enlightenment believed, Man is not a rational creature. Sadly, the vast expansion of knowledge about nature and the physical world has not done much to make people wiser.

Commodities Exporting Countries in Deep Crisis

JOHANNESBURG (South Africa) – Renowned oil expert Daniel Yergin recently observed that the collapse of crude oil prices is just the last act of the commodities ongoing tragedy. Commodity prices exploded in recent years mostly because of historically unprecedented demand from China. But China’s boom is over. And commodity prices are essentially in a free fall, due to lack of demand.

The consequences of this collapse 

Yergin noted that this collapse is bound do have serious economic and political consequences in countries such as Brazil that for a long moment believed that they had become really rich by selling to China. Now the leaders, and the mining conglomerates that operate in their countries, know that it was only a dream. Except that many of them (very unwisely) borrowed a lot during the go-go years, using that dream as collateral.

How bad is it?

Well, how bad is it? Bad enough. According to a BBC report, copper dropped another 2% in recent days. It is now “at its lowest level in six and a half years”. 

Indeed, copper is now at $ 4,995 a ton. We are back to the depressed levels copper reached in 2009, when the world was right in the middle of the Great Recession. And here is the rest of the BBC report:

“Demand for copper, which is used across industry from construction to car manufacturing, has suffered from the slowing Chinese economy. 

Investment bank Goldman Sachs warned investors this week that prices would continue to fall. In a note entitled, “Copper’s bear cycle still has years to run”, its analysts predicted copper prices would probably drop to $4,800 a tonne by the end of December and to $4,500 by the end of next year. The decline in copper is only a part of a global meltdown in commodity prices caused by China’s economic downturn. 

Crude oil has fallen some 60% from June last year, thermal coal has been on a long 60% slide since 2011, and iron ore is down even more, close to 70% since 2010. 

The effects are rippling out into other sectors. On Tuesday, Japanese shipping business Daiichi Chuo Kisen Kaisha filed for protection from creditors, caused by the collapse in Chinese demand for iron ore and coal.

Unsurprisingly the collapse sent a shiver through the rest of the Japanese shipping sector. Nippon Yusen, Mitsui OSK Lines, Kawasaki Kisen Kaisha saw their shares fall between 4% and 8%.

And the effects spread far wider than the mining companies and their support services. Any economy dependent on commodity exports is seeing its currency punished. Australia, whose iron ore, coal, oil and natural gas fueled the Chinese boom, has seen its dollar lose more than a quarter of its value against the US dollar over the past year. [Bold added]

Chile, where copper makes up 30% of the value of its exports, is expected to announce on Tuesday that public spending, having grown almost 10% last year, will rise by half that amount this year. Economic growth there has slowed along with the fall in the copper price and a decline in investment in the mining sector.”

China’s binge

So, here is the thing. China engaged in the construction equivalent of a historic drinking binge. Its leader really thought that they could counter the 2008 Recession through gigantic debt-driven investments in “everything”: shopping malls, luxury condos, high-speed rail, ports and airports. In pursuing this construction extravaganza, the Chinese generated an unprecedented wave of commodities imports.

But now the enormous debt created to finance all of this construction is catching up with China. The boom is over. And the commodities sellers now know tow things. Number one, going forward China’s buying will be modest –at best. Number two, they will have to deal with the massive debt that they contracted in order to finance the growth of their sectors, so that they could meet China’s appetites.

Massive malinvestment

Well, China’s growth was driven by malinvestment. Sadly, it turned out that malinvestment was contagious. Everybody invested in additional capacity hoping that China’s absurd levels of demand for iron ore, copper and what not would continue essentially for ever.

South Africa will suffer, along with Australia, Brazil, Chile, Zambia, and many other commodities exporters. Add to this troubling picture the well publicized afflictions of all oil exporting countries, and then you cannot be surprised when reading that the IMF just revised down its global economic growth projections.

Still, please note that, if there are going to be negative economic repercussions in Germany because of the global slow down, in Brazil and elsewhere it is going to be a lot worse. Brazil and most of the other commodities exporters do not have a “Plan B”.