China Economic Update

Chinese GDP Obsession

~ piercecnorton ~ Leave a comment

EDIT 1/24/2021

I was right. So far, 7 provinces representing a third of Chinese GDP have released GDP targets for 2021. Link.

On December 28th, Macropolo’s Damien Ma and Houze Song wrote – link – that China is “closing the curtain on the GDP obsession era.” Damien, the co-founder and director of Macropolo, runs an excellent think tank, but it is incredibly presumptuous to say that China’s GDP obsession is over.

In 2020, China published its 14th Five Year Plan. In this plan there was no mention of GDP targets. Instead, China was to focus on “getting one’s own house in order (办好自己的事). ” Macropolo’s point is that by not explicitly giving the country GDP targets, Chairman Xi is signaling “changing political incentives.”

[Not publishing GDP targets] is tantamount to simultaneously reshaping political incentives, changing the investment-driven model, and redirecting focus toward de-risking and reforming the economy.

-Damien Ma, Nov 2020

Macropolo is right to signal that this is great change in Chinese policy. For years, Beijing has told provinces what level of GDP to achieve, causing local governments to direct that amount of money into infrastructure. By not giving a growth target, “the Central Committee decided that importance should be placed on structural adjustment, quality, and efficiency. ”

However, changing language regarding growth should not be mistaken for actual, structural change. From the World Bank’s most recent China Economic Update (emphasis mine):

Even as GDP returns to its pre-pandemic level by 2021, the COVID-19 shock has accentuated pre-existing imbalances and highlighted structural challenges. The pandemic and ensuing recovery have caused imbalances in the structure of aggregate demand to relapse, as households increased savings, government support stressed investment, and external imbalances widened. Public and private debt stocks—already high before the pandemic—have increased further. The vulnerabilities in fiscal, corporate, and banking sector balance sheets together with rising debt service costs will weigh on China’s growth, following next year’s strong cyclical rebound.

-World Bank December 2020 China Economic Update

The World Bank goes on to say they expect China to grow at roughly 8% next year. How is it that China could grow so much while focusing on quality and efficiency? The Chinese government is still effectively directing GDP. There might not be a national, explicit target, but funds are being directed through state owned enterprises, provincial govnermnets, local governments, and Local Government Financing Vehicles (LGFVs):

  • Chinese fixed asset investment in transportation will be an eye popping 2.4 trillion RMB in 2021.
  • China has long said – and continues to say – that domestic consumption is top priority, but China has yet to signal any policy to redistribute wealth.
  • Chinese local governments are actively evading restrictions on debt limits. According to public records, the total assets of 960 large LGFVs that regularly disclose financial results rose 40 per cent over the past four years. Their revenues and net income, however, increased just 6 per cent and 4 per cent respectively.

I don’t disagree with Macropolo’s take that China is changing its political incentives. I do find it presumptuous to say that China is abandoning GDP targets when more than 2% of GDP is being directed into transportation infrastructure and no policy to redistribute wealth has been verbalized. In general, I take little stock in the wording of five year plans; the 13th Five Year Plan said almost the same thing, and implementation of economic re-balancing policy completely failed. Why should this time be different? Personally, I’ll believe it when Chinese GDP rises less than 5%, Chinese households increase their share of GDP (wealth redistribution from the state to households), fixed asset investment plummets, and LGFV debt is under control.

In China, nothing is tantamount to simultaneously reshaping political incentives, changing the investment-driven model, and redirecting focus toward de-risking and reforming the economy. Its been tried for decades. For a good read on this, I highly recommend this Caixin article. In short, don’t take Chairman Xi’s word for it; seek truth in actions.

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US-China, A Low Point

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The US-China relationship has reached its lowest point since the Mao era. US hope for a moderate and economically reformed China has faded while China, as it has since the CCP took power, remains ideologically entrenched in communist authoritarianism.

Communist China continues to do what it has done since its founding: obfuscate, threaten, and place the party’s perseverance above all. America, however, is charting into new waters while sailing rudderless with no mission, sense of history, or clear directive.

Chinese consistency

It is important to know that communists do not believe in truth. Truth is a fabrication of the ruling class. In China, truth, regardless of fact, is dictated by the state. Note the following four scenarios where China says one thing and does the opposite.

1.) China is sending aid to Italy while also waging a disinformation campaign.

2.) China’s Foreign Ministry Spokesman Hua Chunying said (source) the following during a press conference on March 31st (my emphasis added):

这么多天过去了，美方还有人在叫嚣，让中国为美国疫情负责，他们难道不心虚、不愧疚吗？这些人试图制造一只世界上最大的锅甩给中国，让中国成为最大的替罪羊…

疫情是面照妖镜，人心善恶、品行高低尽显其中，一览无余。病毒不讲意识形态，也不分国家种族。面对疫情，各国命运与共，污蔑攻击、甩锅推责都弥补不了失去的时间，唯有加强团结合作，才能够尽快战胜疫情.

Now so many days have passed, and some in the US still claim China should be held responsible for the COVID-19 in the US. Don’t they feel guilty or ashamed? They are trying to shift the biggest blame of the century to China and make it the biggest scapegoat….

The pandemic is in some way like a magical mirror that exposes a person’s morality and character to the fullest extent. The virus knows no ideology, border or race. The destinies of all countries are closely intertwined. No one can make up for lost time by slandering others or shifting the blame. The only way to defeat the virus is through solidarity and cooperation.

This messaging from the CCP flies in the face of doctors who were silenced and jailed for raising Covid-19 concerns.

3.) China is still moving backwards economically towards more state control. From Rhodium Group and The Asia Society’s China Dashboard detailing Winter 2019 economic reform:

 The approach to policy…reveals Chinese leadership looking for modest, piecemeal ways to make some progress, not bold moves. The virus emergency stymies even that minimal activism. In the financial system, the emergency measures rolled out to avoid defaults are making the debt problems worse, and this is true in other areas

Chinese media, however, drones about China creating a fair system for the world.

China End Trade War

4.) China, after expelling American journalists, is lamenting about the treatment of Chinese ‘journalists’ (Source):

美方对中国媒体驻美机构进行的政治打压，已成为中美双方良性互动的绊脚石。傲慢与偏见都不是正义，霸凌欺蛮终不能得逞.

The political suppression of the Chinese media in the United States by the United States Government has become a stumbling block for the positive interaction between China and the United States. Pride and prejudice are not justice, and bullying will never succeed.

 

America Asleep at the Wheel

The JCPOA, the Iran Nuclear Deal, was largely criticized for not addressing Iran’s nefarious behavior in the Middle East.  The United States under the leadership of Donald Trump was supposed to renegotiate the deal or embrace a ‘no-deal’ that better aligned with American values.

The Phase One Trade Deal with China mimics the JCPOA. Not only does the deal not address China’s nefarious behavior, it represents no American values. It is wishful manufactured trade.

phase one deal

During the ‘trade war’ China didn’t reduce imports of US manufactured goods excluding autos and planes because China has already squeezed out all other American industrial imports. China’s revealed capacity to manage its commodity imports over the course of the trade war suggests that it could meet its 2020 agriculture and energy commitments.

But, as anyone who has spent time in China will tell you, what the China’s state gives, China’s state takes away.

Chinese US imports

It is important to remember that the Obama administration obtained a cyber security deal and promises to not militarize artificial islands in the South China Sea, and the CCP broke both agreements. Our current agenda with China doesn’t mention human rights (the detention of more than one million Uighurs), violence in the region (militarizing the South China Sea), or the mercantilist trade policies that put the US and China here in the first place. America moved the goal posts from human rights to managed trade in nuts, lobster, chicken feet, and soybeans.

Instead of raising issues that define the country, America’s objectives flow with the current news cycle.

Does America now have wet market conditions to trade? Does this only apply to China?

Why does the President of the United States language on Chairman Xi change when Weibo censors  language supporting America? Does this only apply to China?

America, and I can’t stress this enough, through its foreign policy doesn’t stand for anything. There is no such thing as ‘country X policy.’ Policy must fit into a framework that is applicable to a region. Good China policy derives from a good Asia policy. Good Asia policy is derived from American values. ‘America First’ isn’t a value, an ethic applicable to how you treat people you don’t know. It is narcissist and erodes the moral fabric of the USA.

It was the former president of the European Commission who announced in the spring of 2011: “When it becomes serious, you have to lie.” Jean-Claude Junker indicated there was a posttruth approach to public discourse. He was wrong. China has not only murdered Tibetans, Mongolians, Falun Gong practitioners, students in Tienanmen Square, land holders, intelligentsia, and Uighurs, China has erased them from history. China is as China has been since 1949. The United States has retreated from economic fairness, the South China Sea, human rights, and Asia. Instead of exhibiting leadership at the World Economic Forum in Davos this year, Trump broke his tweet record. If communists have a disposition towards lying and self-preservation, America is currently disposed to abdicating leadership in Asia.

The United States needs a rudder and backbone.