Opinion
August 10, 2023 | 9:05 p.m
Like the infamous Bernie Madoff, the Chinese government reported growth of 7% to 8% each year, regardless of what was really happening to the economy.
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Not long ago, China’s economy was known on Wall Street as the Madoff economy.
Like the infamous Bernie Madoff, who notionally reported stellar returns every year regardless of what was really happening to his investments, the Chinese government was reporting 7% to 8% growth each year regardless of what was really happening to the economy.
It’s no wonder, then, that many Wall Street analysts assumed the country’s economy was growing much more slowly than official numbers suggested.
So how bad must the Chinese economy be when even the “official” numbers are down to 4-6%?
So bad that the communist authorities resort to new tricks.
They instruct their local analysts and put pressure on foreign investment banks not to make negative comments on the economy.
It is a misguided attempt to boost domestic and foreign confidence, limit capital flight and prevent the economy from entering a deflationary downward spiral.
Recently, Chinese economic growth has “officially” slowed to 4-6%.AFP via Getty Images
The country’s troubles could have significant repercussions here in America, not least because China is the world’s second-largest economy and, until recently, was the world’s main growth engine.
On the positive side, a struggling Chinese economy could provide us with much-needed inflationary relief through falling Chinese export prices and lower international oil and food prices.
It doesn’t seem to have occurred to communist officials that attempts to muzzle analysts could have the opposite effect on investor sentiment than intended.
Especially at a time when foreign companies are trying to minimize their supply chain risk to China and the government is stubbornly intervening in the technology sector, the Chinese government should by no means cast doubt on the reliability of China expert reports.
The Chinese government is currently in defensive mode as gross domestic product has not recovered since President Xi Jinping lifted COVID restrictions earlier this year. REUTERS
Given the serious economic policy mistakes committed under the leadership of President Xi Jinping, how are investors supposed to make rational investment decisions in the absence of reliable analysis?
Among the slew of negative economic data that has put the Chinese government on the defensive is the fact that gross domestic product has not recovered nearly as much as expected after Xi lifted its draconian COVID restrictions earlier in the year.
This raises the question of whether the Chinese economy will achieve even the modest official growth target of 5% for this year.
Meanwhile, exports are slumping, producer prices have fallen for each of the past nine months, consumer prices are flirting with deflation and youth unemployment has risen to over 21%.
If the broader economy struggles, the data suggests China’s outsize real estate and credit bubbles are about to burst.
In the past year, many Chinese real estate developers, most notably Evergrande, have defaulted on their loans.
(Just this week, one of the country’s largest private developers, Country Garden, missed interest payments on two dollar-denominated bonds.)
Over the same period, property prices have steadily fallen, housing starts are in deep trouble, local governments are struggling financially due to declining land sales, and the housing market continues to be characterized by literally many millions of unoccupied homes.
All of this, coupled with the fact that China has experienced a larger credit market bubble over the past decade than Japan experienced in the run-up to its lost decade in the 1990s, prompts debate as to whether China may be on the verge of a Japanese-style balance sheet recession.
In such a recession, as prices fall, households tend to cut spending to improve their balance sheets through deleveraging.
It goes without saying that this has an unwelcome cooling effect on the economy by reducing aggregate demand.
The first step towards much-needed economic reform in China would be for the authorities to recognize how over-reliant the Chinese economy has become on unsustainable credit expansion and property market activity.
Rather than suppress external economic analysis, Chinese policymakers would do well to heed these analysts’ warnings about the dangerous path the Chinese economy is on.
Perhaps they would then develop policies that would allow China to avoid repeating Japan’s experience of a lost economic decade.
If not, the rest of the global economy should brace for increased deflationary pressures in China.
Desmond Lachman, Senior Fellow at the American Enterprise Institute, was Associate Director in the International Monetary Fund’s Department of Policy Development and Review and Chief Strategist for Emerging Markets at Salomon Smith Barney.
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