Thursday, March 19, 2015

China Is Not the World’s Largest Economy

The really bad news about China has not been recognized yet. Recently it was discovered that one small community in China was quoting a financial figure for gross turnover to the central government that was approximately seven to eight times greater than what was measurable. The immediate inference is that the real GDP is at least three quarters less than published mostly reflecting the runaway expansion since 2008 in the building sector.

China feels like a Ponzi preparing to nastily contract. The current team has trimmed those growth figures and accepted some fiscal discipline. worse, it is likely becoming impossible to support or find good commercial lending business. Once hooked on converting debt into sales, it is hard to go back.

The shake out will last years and likely drive political reform onto an accelerated path. The real challenge will be to avoid a real depression with the destruction of personal wealth.

China Is Not the World’s Largest Economy

Fraser Howie explains the flaws of the purchasing power parity methodology and why the US is still the world's economic leader
In 2011, most people still thought China, as a nation, had less debt than Europe or the United States because of its relatively low government debt levels. Then came Fraser Howie’s seminal book “Red Capitalism,” one of the first books to expose the debt machine within the Chinese banking system and the risks of the debt-filled growth model.

After a six-year-stay in China, Fraser now lives in Singapore and still has more than a few things to tell us about China and its economy. This is Part 3 in a 3-part series.
Can You Explain Why Some People Think China is Already the World’s Largest Economy?

There is a huge assumption about the purchasing power parity principle these people use and it is usually not stated. It’s underlying the whole principle: The only thing that is different in the economies about the goods and services within is the price and not the quality.
Chinese goods and services are maybe worth 50 percent of U.S. goods and services. You can always see it when things go wrong. Providing a basic service, generally they can do that. If there is a fault, the aftercare service or the follow up is dubious. I use some Chinese software products and the coding is poor. And that leads to poor aftersales service.
What About Other Measures?

Is per capita the right thing to look at? Maybe. I would rather look at which economy is driving the world forward. That has to come back to innovation, use of ideas, services etc.
, Author, Red Capitalism— Fraser Howie
There it’s not solely the United States, as there have always been other countries as well. But the United States is continuing to be a global leader in many areas and things developed in America are copied elsewhere or adopted elsewhere. So it continues to be: Such and such in China is China’s Facebook, it’s China’s Google, it’s China’s Apple, it’s China’s something. But it’s always copying what has been developed elsewhere.
Will That Change Soon?

Whenever we see, this is America’s thing from China, then we could talk about China competing. But I still see very little evidence that China is competing in that way globally in any sphere. I compare WeChat vs. WhatsApp and it’s clunky. It’s like going from the Lego Technic to the Duplo Lego. One is big clunky building blocks and one is really neat and quite incredible.
Things developed in America are copied elsewhere or adopted elsewhere.

, Author, Red Capitalism— Fraser Howie
The quality of services and goods is sorely lacking because Chinese businesses continue to go after price. If all you are doing is price you can never build a quality brand. Sure, the number may be bigger.
I give you an example of the relevance. When I started working 20-odd years ago, the market I followed was Japan. The Nikkei index was coming to its all-time high of 39,000. In the mid 90s the Nikkei was still at 20,000 or so. You had the Hang Seng index that was at 9,000 or 10,000. I remember sometimes in the 90s there was a crossover point.  The numerical value of the Nikkei index is now lower than the Hang Seng index. What does this tell us? Nothing. They are just numbers. Five is bigger than four and Pi is smaller than 10.
But China Will Be Bigger Eventually?

At one point the Chinese economy will be bigger than the United States, so what. For 30 years Japan was the second largest economy and yet it was largely stagnant and didn’t impact the rest of the world. Having a big economy? You are simply summing the activity of 1.3 billion people.
I would rather see the world beating Chinese companies, not merely because they are large, but because they have a monopoly or a cuddled position in China. When Alibaba is competing with Amazon outside of China, then we know that China has a world-class company.
Instead you see that large Chinese companies are large because they have been insulated from competition and China is a large market. Companies that have a favored position are therefore large companies.
There is very little evidence that Chinese companies are succeeding in building networks and success outside of China or Chinese communities.
WeChat is used by overseas mainland Chinese. The ability to build up a Latin American or European community is still very limited. That’s not to say it can’t happen and at one point you would like to think it will happen. But there is also no reason to think that other companies can’t do that.
For 20 years I have been hearing about Chinese companies coming forward and I have seen nothing yet.
Fraser Howie is the co-author of three books on the Chinese financial system, including “Red Capitalism,” named a Book of the Year 2011 by The Economist magazine. For 20 years, he has been trading, analyzing, and writing about Asian markets. During that time he has worked in Hong Kong, Beijing, and Singapore for companies like Bankers Trust, Morgan Stanley, CICC, and CLSA.

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