A woman counts Chinese yuan bills worth thousands of dollars in Vancouver, Canada, on Oct. 27, 2015. (Benjamin Chasteen/Epoch Times)A woman counts Chinese yuan bills worth thousands of dollars in Vancouver, Canada, on Oct. 27, 2015. (Benjamin Chasteen/Epoch Times)

The chief economist of Citigroup is not your average economist. Yes, Willem Buiter studied plenty of economic theory at Yale and Cambridge but then he says funny things like the New York State Driving Test was his “greatest educational achievement.”

He is also very outspoken for someone who works for one of the biggest banks in the world. He thinks Citigroup “must have decided that it was better to have somebody who tells the truth occasionally than to have somebody who tells what people want to hear.”

Epoch Times spoke to Mr. Buiter about a possible financial crisis in China, a devaluation of the currency and potential solutions. [Skip to 19:00 in the video]

They are going to have a financial crisis.

— Willem Buiter, Citigroup

Epoch Times: What are China’s problems?

Willem Buiter: China has three problems. It has a madly over-leveraged corporate sector, banking sector, and shadow banking sector that really need restructuring and consolidation. It has massive excess capacity in many of the crucial industries, so it has a cyclical problem.

And then it needs to rebalance: From export growth to domestic demand that goes from investment growth to consumption; from physical goods growth to services; from I can’t breathe to green; and a growing role for the private sector. This simply isn’t happening at the moment.

Citigroup Chief Economist Willem Buiter at an interview with Epoch Times in New York on July 6, 2016. (Epoch Times)

Citigroup Chief Economist Willem Buiter at an interview with Epoch Times in New York on July 6, 2016. (Epoch Times)

Growth has stopped falling at the moment, though it is significantly lower than what it was, but only by unsustainable stimulus measures.

This is credit growth that adds to the excessive leverage. Investment in sectors where there is already excess capacity, basically building up a bigger and harder landing by postponing the necessary adjustments.

The rebalancing has been put on hold because this requires active and innovative policy making. With the anti-corruption campaign still in full swing, in its fourth year now and if anything intensifying, all senior civil servants in the ministry or the party are unwilling to stick their necks out and do something untried and new. The stuff that is required both in terms of financial stability management, in terms of stabilization policy, the right kind of fiscal stimulus and in terms of rebalancing.

Epoch Times: What can be done?

Mr. Buiter: We need to increase the role of the private sector to cut back on state-owned enterprises. What is happening? We’re growing state-owned enterprises because that is the path of least resistance because we know how to do that.

So then China is in a holding pattern, and I think it won’t change until there is a long-run rebalancing, until the political issues that are reflected in the anti-corruption campaign are settled, it won’t be supported by the right fiscal policies.

Unless they are willing to go for Chinese helicopter money, fiscal stimulus targeted mainly at consumption not at investment. Yes, some capital expenditure like social housing, affordable housing, yes, even some infrastructure.

But organization supporting infrastructure, not high-speed trains in Tibet. It has to be funded by the central government, the only entity with deep pockets and it has to be monetized by the People Bank of China.

That is what the country needs and at the moment it is incapable politically—not technically—of reaching that kind of resolution. I think it is unlikely that they will be able to achieve that without at least a cyclical downturn of some severity. How deep depends on how quickly they respond when things start visibly going pear shaped.

Workers go about their chores at a construction site for new shops in Beijing on November 28, 2011.  (Goh Chai Hin/AFP/Getty Images)

Workers go about their chores at a construction site for new shops in Beijing on November 28, 2011. (Goh Chai Hin/AFP/Getty Images)

Epoch Times: What’s your estimate of Chinese GDP growth at this moment?

Mr. Buiter: Somewhere below 4 percent. The official figure is still around 7 percent, but those data are made in the statistical kitchen.

Epoch Times: So if growth is 4 percent and interest rates are 8 percent, doesn’t this create problems?

Mr. Buiter: Real interest rates are high in China. Especially for what I call honest, private borrowers. The relationship of the interest rate to the growth rate drives the debt to GDP dynamics. The so-called snowball effect is adverse when the interest rate exceeds the growth rate and that is probably the case now.

So there’s a problem there. They are solvable. That’s nothing beyond the ken of man. The wheel doesn’t have to be reinvented but having the tools and being politically able to use them and willing to use them are different things. China has the tools but not yet the willingness and ability to use them in the way that is necessary to avoid a hard landing.

Financial Crisis

Epoch Times: So we are talking about a somewhat similar problem than in Europe. We would have to write down a lot about of bad debt. We recapitalize the banks and then stimulate the consumer to get inflation?

Mr. Buiter: In Europe of course, we should really fund the capital expenditure. Investment rates are notoriously low in Europe. China has the opposite problem. They need to boost consumption. So there’s an obvious win-win situation that we could have.

Debt restructuring, haircuts if necessary and then a well-targeted fiscal stimulus funded ultimately through the European Central Bank (ECB), people’s helicopter money. China will be aiming at consumption. The composition is different because China invests too much.

You can have a good old financial crisis without having the 1997-1998 Asian foreign debt issue, which China does not have.

— Willem Buiter, Citigroup

Epoch Times: What if China doesn’t address the problem?

Mr. Buiter: They are going to have a financial crisis. It can be handled because 95 percent of the bad debt is yuan-denominated, but you have to be willing to do it, you have to be proactive.

The United States didn’t have a foreign currency denominated debt problem when it had the great financial crisis. Banks fell over. These were all dollar denominated liabilities. You can have a good old financial crisis without having the 1997-1998 Asian foreign debt issue, which China does not have.

So a financial crisis is a risk. Then, of course, a sharp depreciation of the yuan which would be the consequence if the reserves would have to be used to safeguard systematically important entities that do have foreign currency debt. This would be the consequence of a failure to act, a recession and, in the worst case, a financial crisis. Again, something that’s survivable; not the end of the world, but very costly and politically destabilizing.

The official figure is still around 7 percent, but those data are made in the statistical kitchen.

— Willem Buiter, Citigroup

Devaluation

Epoch Times: But the currency would have to go down.

Mr. Buiter: I cannot see the yuan following the dollar over the next year, let alone two years, no. I do think that at the moment, the market is no longer afraid of an eminent sharp depreciation. So capital outflows driven  by expectations of a sharp depreciation have ceased. But they could be back like that, especially if there are more kerfuffles in Europe, another flare up. Maybe the banking crisis, and as a result further upward pressure on the dollar and other safe-haven currencies.

And the Chinese currency is being dragged along? I don’t think so. They will have to decouple. So that is a channel which for external reasons, the yuan peg might become hard to manage.

Epoch Times: How do you see the rest of the year?

Mr. Buiter: Continued subdued growth. China is flirting with the loss of faith in its ability to manage its currency and flirting with a sharp slowdown in activity. Europe and the rest of the industrial world, assuming that the Brexit negotiations remain orderly, not too hostile and growing more slowly than it did last year but not dramatically more slowly.

If Brexit becomes a dog fight between the 27 and the U.K. If Brexit becomes contagious, through general elections in the Netherlands in March next year, in France, Germany. If the Italian referendum in October or November this year goes against the government and fear of emulation of the British example takes over, then there could be a further, deeper slowdown in activity.

The United States again should putter around roughly the same way as last year. So mediocre growth at best with mainly downside risks. A few emerging markets—Russia, Brazil—will do better this year than they did last year simply because it’s impossible to do worse.

The wheel doesn’t have to be reinvented but having the tools and being politically able to use them and willing to use them are different things. 

— Willem Buiter, Citigroup

The specific shocks, home-made mainly in Brazil, partly external like oil prices in Russia and sanctions. These things are no longer slowing them to the same extent. So some recovery is possible.

It’s going to be a secular stagnation world, unless we provide the combined monetary fiscal stimulus and the longer term, supply side, enhancing measures to promote growth, higher capital expenditure, better education and training including vocational training, sensible deregulation, less disincentivizing taxation and all that.

All these things are necessary to keep potential output at a level that allows fulfilling our ambitions, but even the miserable level of the growth rate of potential output won’t be achieved unless we have additional stimulus.

 Epoch Times: So no way for stocks to go up another ten percent from here?

 Mr. Buiter: Everything is possible but I think the fundamentals say no.

Follow Valentin on Twitter: @vxschmid

Read the full article here

A customer selects vegetables at a supermarket in Hangzhou, in eastern China's Zhejiang province on March 10, 2016. (STR/AFP/Getty Images)A customer selects vegetables at a supermarket in Hangzhou, in eastern China's Zhejiang province on March 10, 2016. (STR/AFP/Getty Images)

China’s GDP grew at 6.7 percent year on year in the second quarter of 2016, at least officially. However, most analysts don’t believe the official figures.

“The official figure is still around 7 percent, but those data are made in the statistical kitchen,” says Willem Buiter, the chief economist of Citigroup. He thinks China is not growing at more than 4 percent.

After reporting 6.7 percent growth over the year in the first quarter of 2016, analysts were looking for 6.6 percent growth in the second quarter compared to the second quarter of 2015, so China managed to engineer a small beat and create the illusion of stability. Quarterly growth even picked up from 1.1 percent in the first quarter to 1.8 percent in the second quarter. 

China is in a holding pattern and I think it won’t change until there is a long run rebalancing

— Willem Buiter, Citigroup

“The speed of growth that it points to is increasingly hard to believe given the clear structural drags that the economy is facing,” research firm Capital Economics writes in a note. The analysts think China grew 4.5 percent based on a proprietary activity index, roughly the same as in the first quarter.  

(Capital Economics)

(Capital Economics)

Private investment was the biggest drag on growth, it just expanded 1 percent in May, down from 15 percent in early 2015. State companies have picked up the slack. 

(Capital Economics)

(Capital Economics)

A survey of thousands of companies by the China Beige Book (CBB) released earlier in July paints a similar picture. 

CBB says most indicators improved in the second quarter, although activity is roughly flat over the year. In most cases, less than 50 percent of survey respondents report an improvement in sales, hiring, capital expenditure, or bank lending.

Capital Economics thinks most of this stabilization in growth was due to stimulus spending and will fade in the future, unless the government steps in again.

“Unless policymakers launch another round of monetary easing soon, the tailwinds to growth from past stimulus efforts will fade by early next year,” the note states.

Many analysts are still waiting for a rebalancing of the economy and growth driven by consumption rather than investing, something that is not happening, according to Buiter.

“China is in a holding pattern and I think it won’t change until there is a long run rebalancing; until the political issues that are reflected in the anti-corruption campaign are settled; and it will be supported by the right fiscal policies.” 

If China doesn’t tackle important reform projects, it won’t return to real rates of growth above 6 percent anytime soon, says Buiter. “China is flirting with the loss of faith in its ability to manage its currency and flirting with a sharp slowdown in activity.”

Read the full article here

Let’s start with the facts: During the first quarter of 2016 and during a time when the Chinese economy stared into the abyss, the Chinese financial system created $712 billion in new loans. This is the highest amount of loans created on record, even higher than in 2009, right after the financial crisis.
Because China has one of the highest debt loads on the planet (346 percent of GDP according to Rabobank estimates—others estimate as low as 250 percent), analysts are sounding the alarm bells.
If China’s new loans were a whole economy, it would be bigger than Indonesia and the Netherlands. (Royal Bank of Scotland)
“China has engineered yet another credit boom to arrest the sharp drop in growth,” writes Marcus Wright of the Royal Bank of Scotland. What he means with “yet another” is the previous record build up in debt after the financial crisis which went almost exclusively into projects with little or no economic value. This is why the analyst calls the increase in debt a move “further away from what is desired.”
After all, even the Chinese regime admitted it needs to reduce investment spending, cut overcapacity, and rebalance the economy toward more consumer spending. So what about the record increase in debt in the first quarter? Not to worry, says Xinhua, the regime’s mouthpiece in an editorial published May 2.
“China will not resort to large stimulus measures; policymakers are more than aware of the consequences of such a short-sighted program,” it says, adding that “fears are unfounded” and that “this rapid increase in loans is temporary.”
The ramp up in debt is reminiscent of the financial crisis (Royal Bank of Scotland)
Note that Xinhua speaks of stimulus in the future tense, as if the increase in debt wasn’t stimulus that already happened in the first quarter and as if banks were somehow independent of the central government. Because the central and local branches of government own most banks in China, almost any increase in debt is equivalent to official government stimulus, as Mark DeWeaver demonstrated in his book “Animal Spirits With Chinese Characteristics.“
Christopher Balding, professor of economics at Peking University had this to say about the Xinhua editorial: “I think you guys already missed that off-ramp,” he commented on Twitter.
Further evidence he may be right and Xinhua may be wrong: The fiscal deficit. China usually runs deficits of about 1 percent, with notable exceptions during the financial crisis, when it approached 3 percent. This year, the regime is targeting a deficit of 3 percent or more, making it the highest in 34 years.  
(Royal Bank of Scotland)
Again, Xinhua thinks this will all be productive investment in the long-term: “However, instead of being channeled to investment projects with short-term impact on GDP, as was the case back then, the lion’s share of the current new loans ended up funding long-term programs, supporting small businesses, and facilitating consumption, such as housing.”
We all know accurate statistics isn’t exactly China’s strong point, but counting housing as consumption is a novelty even the National Bureau of Statistics would have a bone to pick with.
Also not consumption is what Xinhua lists as “the start of numerous infrastructure projects,” and the systematic stockpiling of commodities.
Instead, the Royal Bank of Scotland thinks China has exactly the same problems as before and has abandoned the rebalancing objective to keep the economy from crashing.
“The economy remains beset by: an excessive reliance on investment driven growth; a structurally low share of GDP going to household incomes; overcapacity in key sectors; hidden non-performing loans in the banking sector [and] ad-hoc, reactive policy-making that fails to address the underlying distortions in the economy.”
Or in the words of famous psychologist Abraham Maslow: “I suppose it is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail.”

Read the full article here

By and large, the market is used to China fiddling with its economic numbers, or making them up completely, like GDP figures.
The market, however, mostly believed the figures on foreign exchange reserves as well as capital flows released by the People’s Bank of China (PBOC) and the State Administration of Foreign Exchange (SAFE). At least until now.
According to the South China Morning Post, the PBOC removed a key number about foreign exchange transactions in the banking system for January 2016. The report in question is titled “Sources and Uses of Credit Funds of Financial Institutions.”
The January report only includes foreign exchange transactions by the central bank and excludes the remainder of the banking system. It also merged another item related to foreign exchange transactions of banks and the central bank into an “other” category, making it harder to distinguish economic actors.

Not the First Time
This change in methodology comes at a crucial time for China, which is bleeding foreign exchange reserves and foreigners as well as citizens are pulling out capital in record numbers.
Foreign exchange reserves at the central bank level decreased by $99 billion and the Institute of International Finance (IIF)estimates as much as $113 billion in capital left the country in January.
We have this on our radar as a significant risk to watch for. We are not the only ones who are worried about this.— Emre Tiftik, Institute of International Finance

Emre Tiftik, who tracks the data for the IIF, says he started to notice strange moves in the data regarding capital flows after the surprise devaluation of the renminbi last August.
“Starting from the third quarter, there are so many outliers in tiny places which created the impression officials are trying to reduce the outflows,” he says.
An example is the category of “other assets,” in the capital account which represents “other” inflows into China. According to Tiftik, it wasn’t much higher than $50 million per quarter and then suddenly increased to $100 billion in the third quarter, reducing the net number of outflows.
Outward direct investment, the money Chinese are investing abroad also turned sharply negative, which means Chinese are selling foreign assets and repatriate the money. Another reduction in the total outflow figure.
“They completely changed the outward direct investment figures, they were -$30 billion now they are -$45 billion,” said Tiftik.
MORE:Steve Keen: China’s Stock Market Is an ‘Unbelievable Bubble’
Robin Koepke, chief economist at the IIF notes another instance of data manipulation occurred in the middle of 2015: “This is a massive problem. We had the same issue when they started reporting more data on equity portfolio flows in early 2014 and then stopped in the summer of 2015, right when the markets became volatile,” he says. The last number of June 2015 shows an outflow of $11 billion.
Without adjusting for all these erratic moves, the IIF estimates $637 billion left China in 2015.

But the people at the IIF and the South China Morning Post aren’t the only ones missing data on China’s foreign exchange holdings or transactions.
Last October, Harvard professor Carmen Reinhart noted the Federal Reserve had stopped separating official and non-official foreign holders of Treasury securities in the Flow of Funds report.
China is becoming the capital provider to the rest of the world.— Emre Tiftik, Institute of International Finance

“They always reported ‘Rest of the World,’ and then within ‘Rest of the World’ they segregated ‘Official Institutions’ from ‘Non-Official.’ In the last couple of reports, they stopped separating into ‘official’ and ‘other.’ ‘Official’ were foreign central banks. Within foreign central banks, China was in a league of its own. I don’t know really what prompted that change,” she said.
What Happens Next
When officials stop releasing certain data, it usually doesn’t bode well for the future. In 2006, the Federal Reserve stopped releasing data on M3, a measure of the money supply, which included so-called repurchase agreements or repos.
In 2008, Lehman Brothers went bankrupt after financial markets found out it funded itself almost exclusively with short-term repos, had borrowed too much to begin with, and most likely wasn’t able to repay its lenders.
MORE:Market Forces Could Push China to the Brink
As for China, Tiftik thinks Chinese people are going to move money out of the country wholesale and foreigners won’t move a lot of money in.
“We believe that non-residential inflows [investment by foreigners] are going to be weak in 2016. Residential outflows [investment abroad by Chinese] are going to increase in 2016. China is becoming the capital provider to the rest of the world. This is unavoidable, this will happen,” he said.
This is only possible, however, if China sticks to its agenda to liberalize the current account and does not impose more capital controls because of outflows.
With a closed capital account and stable exchange rate “the Chinese [regime] invested foreign exchange on behalf of private parties. They collected reserves and invested them in Treasurys. Now the residents and the corporates are starting to provide capital to the rest of the world with the capital account liberalization,” says Tiftik.
Will this move lead to a rapid devaluation of the yuan versus the U.S. dollar?
“We have this on our radar as a significant risk to watch for. We are not the only ones who are worried about this.”

Read the full article here

After some terrible data in January, the Chinese economy is out of the woods for the rest of the year. The Chinese lunar year that is, because until February 7, 2016 there are only two official data releases, none of them terribly important.
But even if we will be spared confusing trade data, bad manufacturing and GDP figures, as well as the constant drain on foreign exchange reserves, it doesn’t mean analysts can’t come up with their own estimates of economic data and spook the markets.
Like the International Institute of Finance (IFF) for example, which said Chinese capital outflows were as high as $676 billion in 2015.
International Institute of Finance
“The 2015 outflows largely reflected efforts by Chinese corporates to reduce dollar exposure after years of heavy dollar borrowing, as expectations of persistent yuan appreciation were replaced by rising concerns about a weakening currency,” the report states.
This behavior refers to the infamous “carry-trade” where investors borrow in a country with a low interest rate (the United States) and invest in a country with a high interest rate (China).
In previous cases of this carry trade phenomenon, it was usually international banks or hedge funds doing it. This time is was Chinese corporations, which in the absence of some real economic opportunities on the ground also used to engage in real-estate speculation while the sector was still hot.
“Chinese money is going into real assets in the West and to some degree repaying foreign currency debt.”— Charles Dumas, Lombard Street Research

This carry trade was a safe bet because the Chinese central bank guaranteed the yuan to be stable vis-a-vis the dollar or even let it appreciate a bit. This convincing value proposition let Chinese gross external debt double since 2009 to $900 billion in 2014.
This safe bet changed when the regime surprisingly devalued the yuan in August and openly stated it would like to have a cheaper currency, even though Charles Dumas of Lombard Street thinks the market gets the causality wrong.
“They are reading the regimes desire to have a weaker currency because the economy is weak. The cause and effect is the other way around. It’s the weakness in the economy which is driving the currency and the market.”
(International Institute of Finance)
Whichever came first, the chicken or the egg, there was pressure on the currency since the end of 2014 as the smart money (i.e. the politically connected) started to move out.  
Once the regime confirmed its new currency policy, the flood gates opened and carry-traders scrambled to close a now losing position, not knowing how much the yuan was going to drop against the dollar.
“Foreign investors in local currency products have faced large losses measured in dollar terms and domestic borrowers in foreign currency have suffered balance sheet losses from currency mismatches,” states the IFF report.
But it’s not only the carry traders and the smart money who are moving their money out. Average Chinese are funneling money out of the country in record numbers as well, despite the capital controls.
“[The] data showed a broadening in the pattern of net outflows, including a significant decrease in foreign direct investment and, to some extent portfolio flows, especially debt, and a jump in unrecorded outflows reflected in errors and omissions.”
The IFF thinks these $216 billion worth of “errors and omissions” are a good proxy for capital flight.
“Chinese money is going into real assets in the West and to some degree repaying foreign currency debt,” says Dumas.
The regime desperately tried to contain the situation by openly intervening in the foreign exchange markets, spending up to $405 billion according to IFF estimates, but the yuan still dropped 5 percent since last January.
As for both the Gregorian and the Chinese 2016, the IFF doesn’t think it will get any better. “China would see further large overall capital outflows as it continues to struggle against macroeconomic headwinds and to intervene heavily to stabilize its currency,” states the IFF report.
According to Dumas the current monthly outflows are as high as $100 billion.

Read the full article here

 
The beauty about economics is that you can have one number and a myriad of different interpretations.
Take China’s GDP growth for 2015 for example. There is the annual growth rate of 6.9 percent. That one is pretty straight forward, it means that output in the world’s second largest economy is now 6.9 percent larger than at the end of 2014. And 6.9 percent is pretty high absolutely speaking, although it is quite a bit lower than the 7.3 percent growth of 2014.
Then there is the fourth quarter of 2015. Here it becomes a little bit tricky. Compared to the fourth quarter of 2014, GDP was 6.8 percent higher, missing analysts’ expectations of 6.9 percent. Note that we are comparing only the output produced in the last three months of the years of 2014 and 2015 respectively.
Since GDP is a measure of output, changes in price distort the measure.

Growth was slower from the third quarter of 2015 to the fourth quarter of 2015. It increased 1.6 percent, or 6.4 percent if we pretend we had the same growth for a full year for an easier comparison with the other figures.
Absolutely speaking all of these figures are pretty high, but compared to recent years, it is pretty clear growth is slowing down.
Growth is trending down (Trading Economics)
But here is the real problem: All those figures are quoted in real terms. This means they are adjusted for inflation. Since GDP is a measure of output, changes in price distort the measure, after all we want to know what the extra output was, and not how much the existing output increased in price. This adjustment is common practice around the world and the number used to make the adjustment is called the GDP deflator, which is slightly different from the consumer price indices the media likes to cite.
Under normal circumstances GDP is adjusted downward to account for positive inflation. So if all the goods and services produced in China are worth 10 percent more over the year (in terms of price and quantity) and inflation was 2 percent, then real growth in output would be 8 percent. This is what happened in China since 2009.  
The growth could simply be overstated.

Not this year. The GDP deflator which adjusts output growth was -0.8 percent in the fourth quarter. Because it is negative and describes a decrease in the price level, it gets added back onto the value of goods and services produced. We want to know the amount produced compared to last year and not how much the same output of last year is worth according to the lower prices of this year. This process gives us the real comparable value of goods and services produced, which grew at 6.8 percent in the fourth quarter.
Not accounting for these price changes, however, China’s GDP grew only 6 percent over the year. This is the nominal as opposed to the real number.
Nominal growth is lower than real growth for the first time since 2009 (Nomura)
And here is where it get’s really tricky. If we look at the history books, we would be hard-pressed to find any economy growing north of 5 percent which has a negative GDP deflator. Growth in that order of magnitude signals there is a lot of demand for products and services, putting upward pressure on prices because producers need some time to bring new production online to meet the growing demand.
Unless of course you are China and you invested so much in production capacity that it’s already there to meet new demand before anybody even knew the demand existed. In this case there could be growth and falling prices at the same time, although it is very likely the growth will follow the prices down sooner rather than later.
It is also telling that the GDP deflator only turned negative for the second time only since the year of 2000 in the first quarter of 2015, the real beginning of the slowdown in the Chinese economy.  
Or the growth could simply be overstated. In China’s case, the GDP deflator tracks the producer price index which has been falling ever since 2012. In simple terms, the producer price index tracks wholesale prices for the domestic Chinese economy.
However, consumer prices have been rising at around 2 percent for the last 4 years and gives us market value of goods and services for the consumer market, which represents roughly one third of the Chinese economy. In fact, many of the products sold wholesale and tracked in the producer price index are sold to consumers in the end.
Most economists who follow the intricacies between nominal and real GDP think that inflation is between 1 to 2 percent higher and therefore growth should be 1 to 2 percent lower. In the fourth quarter’s case, a GDP deflator of plus 1 percent, would mean real growth of only 5 percent (6 percent nominal minus 1 percent inflation). A much more realistic representation of Chinese growth.
 

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China enthusiasts and supporters of the Beijing Consensus have mainly cited two elements as a proof of China’s invincibility.
The first is rapid GDP growth, mostly higher than 10 percent per year over the last two decades.
The second was an enormous stash $4 trillion in foreign exchange reserves. The emphasis here is on “was” because this stash since melted to $3.3 trillion at the end of 2015, the first annual decline on record and there is no end in sight.
(Bloomberg)
So that leaves us with GDP growth to prove the superiority of the Beijing Consensus’s model of state capitalism.
Jan. 18 2016 will make us a bit smarter in that regard as China releases fourth quarter GDP figures and the annual number for 2015 at the same time.
GDP growth is also in a downtrend, although analysts still expect 6.9 percent growth for the year.
(Trading Economics)
Chinese officials have said they need growth of at least 6.5 percent until 2020 to successfully rebalance the economy away from investment to consumption.
Aside from the fact that official data is mostly made up according to the current Premier Li Keqiang—he said so in 2007 when he was a lower party official—there are other reasons to expect growth to come in lower than the 6.9 percent expected.
Communist party leader Xi Jinping told us in November that growth for 2016 will be no less than 6.5 percent. Since then several think-tanks and statistic bureaus have reiterated this expectation.
China doesn’t like volatility. It might have to report less than the 6.5 percent for 2016 if case the situation on the ground deteriorates further. This would mean a large drop from the 7 percent of 0.5 percentage points.
If on the other hand, if China reports a very bad fourth quarter 2015 and lower annual growth for 2015 around 6.7 percent, it could make the market believe the worst is over and expect a positive surprise in the first quarter of 2016.
For the data on the ground, these deliberations hardly matter.  As Gordon Chang points out, real 2015 growth was closer to 1 percent—a number Beijing will not report for the foreseeable future.

Read the full article here

I you believe the latest headlines, China’s trade data for December 2015 was really good. Exports rose 2.3 percent in yuan compared to December of 2014 and imports only dropped 4 percent.
This is good because exports collapsed 3.7 in November and the market expected imports to decline 8 percent. Investors like Shane Oliver at AMP Capital Investors Ltd. think this is a sign “the Chinese economy is stabilizing rather than collapsing.”
Unfortunately, this may be wishful thinking, as there are a lot of problems with these figures. For starters, the biggest contributor to the 3.5 percent increase in exports from November was Hong Kong with 40 percent.
Why is this a problem? While the mainland registered the increase in exports to Hong Kong, the special administrative region did not register the imports.
The cargo may have disappeared at sea, but a more likely explanation is that the mainland artificially boosted the numbers for exports, whereas Hong Kong reported imports more or less accurately.
(Bloomberg)
Goldman Sachs had this to say about the December numbers: “Readers are advised to take a grain of salt when interpreting the latest exports data as a sign of a change in growth momentum.” The analysts think local officials have an extra incentive to artificially boost exports approaching the end of the Chinese calendar year.
The local officials may have exported some goods earlier to meet the year end growth target or even resorted to shipping the goods back and forth to special trade zones.
This is common practice in China: “A poor villager can boast he has thousands of yuan of turnover every day, but people later discover he only has one bull—he takes the bull out every morning and brings it back every evening,” Lin Yongtai, a manager at a company offering these services told Bloomberg earlier. “The same applies to some parts of China’s foreign trade.”
But not only exports are problematic. Goldman thinks Chinese use imports to funnel money out of the country. “Imports data on the other hand are potentially subject to over-reporting by traders to facilitate FX outflows,” the analysts write. In that case an importer from China would get an invoice of $200 for $100 worth of goods to be able to transfer the balance to an overseas bank account and avoid capital controls.
While many Western observers were pleasantly surprised with the data, somebody in China didn’t buy it. It was the stock market, down another 2.4 percent Jan. 13 and closed just 22 points above the August 2015 low of 2927. 

Read the full article here

Western commentators complain that China’s 7 percent stock crash on Jan.4 is a  dreadful start to the new year.
Well, technically speaking, the Chinese still can hope their new year is going to be better than the old one, as it only starts on February 8.
Until then, it looks like it’s going to be downhill for the economy, stocks, and the yuan.
The Shanghai composite slipped 6.9 percent to 3296 on Jan. 4, triggering circuit breakers. The onshore yuan dropped 0.37 percent against the dollar.
(Google Finance)
 
Official GDP numbers come out on Jan. 19 but whatever the official number, it real growth won’t be good judging from data on the ground.  
Market commentators blame recent weak manufacturing data and new IPOs but analysts knew all of this beforehand.
In fact, if you look at any data coming out of China, whether it’s official or unofficial, all of it is pointing south. 
Research Firm Capital Economics compiled a chart book of important indicators for the Chinese economy based on official data, showing firmly established downtrends.
The currency will devalue further against the dollar because it has actually gotten stronger in trade weighted terms  in 2015 and that’s what China cares about.
This is the only reason why China launched a trade weighted index for the yuan, so it has a justification to devalue further against the dollar. 
(Capital Economics)
Official GDP growth slowed to 6.9 percent in the third quarter of 2015, but Capital Economic’s own activity proxy indicates growth of only 4 percent.
Electricity consumption, one of the best economic indicators is not growing at all. 
(Capital Economics)
Retail sales are still growing at 10 percent, but retail is not a large share of the economy and growth fell from a peak of almost 20 percent right after the financial crisis.
(Capital Economics)
Trade has collapsed, firmly trending down.
(Capital Economics)
Producer and commodity prices are deep in deflationary territory. Capital Economics is optimistic this will change soon though.
(Capital Economics)
Credit is still growing, but also trending down. Also, the ratio of output per unit of credit decreased dramatically over the years.
(Capital Economics)
Knowing all this, how can traders be surprised by weak manufacturing data? Hope dies last. 
 

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This year, the Chinese economy hit a rough patch. Whether it is official data, bank research data, foreign exchange markets, or commodity prices, they all paint the same picture.
Many economists predicted this slowdown, but there was one researcher who knew it first. Leland Miller of the China Beige Book operates the most comprehensive system of real-time business surveys in China and claims to have the most reliable and timely data.
Each quarter, his researchers contact thousands of businesses across the country and interview high-level executives to find out what the economy looks like from the ground.
Modeled after the Federal Reserve Beige Book, Miller and his team replicated this approach in China—with stunning results. 
Epoch Times spoke to Mr. Miller after CBB published a particularly worrisome report for the fourth quarter. 
They are realizing there is going to be pain.

Epoch Times: Your fourth quarter, on the ground report on the Chinese economy was pretty bad. Why did this surprise you?
Leland Miller: It has been a long term slowdown. It was something that read out very clearly in the data across quarters and years.
But before this quarter, over the summer, the markets went from optimistic to becoming bearish in a short time. It was the mismanagement of the stock market and people were wondering whether this meant the incompetence in running the stock market would spill over: If these are the same people running the economy, why won’t we see similar problems elsewhere?
The second thing was the currency devaluation, which was justified considering what was going on with other currencies. But it wasn’t communicated very well and investors were left wondering whether this was part of a bigger thing—maybe the start of currency wars, or clandestine stimulus policy through other means. Investors didn’t understand what was happening.
The third strike was the weak manufacturing data—low manufacturing indicators, very low official data for manufacturing. China Beige Book manufacturing data was very weak as well.
Chinese workers prepare stuffed toys at a factory on September 17, 2015 in Zhejiang, China. The China Beige Book surveys thousands of small and large businesses in China.  (Kevin Frayer/Getty Images)
The combination of these three things got people nervous and caused a market sell off based on the mistaken notion that China had become fragile over night and was about to blow up.
So we have been saying, there are problems, let’s track them, but the system is not crashing now. 
In the third quarter, we had the modest slow down continue, but it was not a crisis and the data looked similar to the type we had been seeing for two years. No question there was a slowdown, but the third quarter wasn’t markedly different from what we had been seeing before.
The new data shows significant deterioration that wasn’t there over the summer when everybody got scared. We saw significant weakness in revenues and profits, which had been relatively strong for the last couple of years despite the economy’s deceleration. What made this drop in profits more concerning was that the two hidden sources of strength looked shaky in Q4 as well.
Epoch Times: You are talking about the price level and the labor market?
Mr. Miller: The inflation picture—it looks like for the first time it could have been harmful deflation. We have not been tracking deflation broadly, but this time it starts to look like disinflation has become deflation for some firms.
If you don’t have firms interested in borrowing and spending, you will have a hard time enacting a stimulus program.

And the labor market, we have been talking about the surprising stability of the labor market despite the economy slowing down. Analysts mistakenly assume the economy is slowing down, so the labor market has been weakening. That wasn’t the case. But in Q4, it’s worrisome, a lot of metrics went down, from job growth to labor supply. Wage growth also slowed.
Now, this is one quarter, it’s not yet a trend. But the data are interesting and different enough to raise at least a yellow flag right now.
We thought the slowdown would change China dramatically over time, but it’s one that investors and the regime can manage. But the type of slowdown we saw this quarter—if it continues in the future—then this will be something very different and much more difficult to manage.
Epoch Times: What about China’s currency policy, monetary policy, fiscal policy?
Mr. Miller: We think the Chinese are not very likely to devalue the currency dramatically. Especially with the strong dollar, there will be some depreciation against the dollar. We think there is going to be depreciation, but they are not trying to do a one-off devaluation
For a long time, the people assumed the Chinese have monetary stimulus on the one hand and fiscal stimulus on the other hand. Rates have been falling for a number of quarters and yet the share of firms borrowing has been dropping despite that. Capital expenditure was falling.
You have to understand that the promises of 7 percent growth forever are part of a political narrative that don’t reflect reality.

If you don’t have firms interested in borrowing and spending, you will have a hard time enacting a stimulus program.
All the talk is about fiscal policy. But if you look at some of the sectors that are most relevant to the government trying to boost up stimulus, it’s transport and transport construction. Both of those sectors have had a dismal fourth quarter.
If this fiscal stimulus is happening, why aren’t those sectors improving. If you have the ammunition, were is the evidence it is actually working? We have shown for years monetary stimulus no longer works.
If this becomes a new normal, if the labor market is weakening, if sectors keep showing those downticks, will the Chinese decide to double down on stimulus even though they know it has limited use.
Epoch Times: Is the regime panicking?
Mr. Miller: I don’t think they are panicking. Trying to stage manage a slow down for years, the dynamics are changing and certain things scare them a bit, like what happened over the summer. They are trying to do it as painlessly

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We know China’ economy is slowing down. We know China is devaluing its currency. But what happens on the ground? How do businesses and their leaders respond to the change in the economic climate?
Apart from the China Beige Book, which surveys thousands of companies on the ground, consulting firm McKinsey regularly conducts interview with high level CEOs.  
This time they asked 70 CEOs of large multinational companies active in China how they are doing. Like the economy as a whole, the answer was a bit mixed.
“Two challenges China CEOs [face] are hitting the numbers while they cope with the downturn in demand, as well as building their local teams,” the report states. A full 80 percent say they are having difficulties to respond quickly enough to the changes in the Chinese market.
The good news: Most of them say their companies are still growing faster than their market segment in China and they view China as a good place to advance their career.
When they go about solving problems, however, they don’t get much help from their headquarters or regional CEOs. 
“Another major issue is managing headquarters, including explaining the unique Chinese context to senior management there,” McKinsey states.
It is unclear what they mean with unique situation, but there are several unique things about doing business in China worth mentioning. 
Maybe the executives have problems explaining that China is very corrupt and demands unique measures to get business done: Like JP Morgan, which hired the children of influential communist party members to get more business.
Or the fact that Chinese workers are increasingly getting upset with the economic downturn, staging protests and strikes in record numbers.
(Wall Street Journal)
Or the fact that some business people just disappear without notice because they haven’t been following the party line on how to deal with the stock market crash?
All of these would be pretty difficult to explain to headquarters based mostly in Europe and the United States.
To add insult to injury, the 70 China CEOs confirm the environment for multinationals in China is not getting any better.
“Most don’t see the business environment in China getting any easier. Most also fear that the policy environment for multinationals in the country will get more challenging,” states the report.
After last year’s raid of Microsoft offices and fines for Volkswagen and Chrysler for “anti-competitive behavior,” this hardly comes as a surprise. But it serves as a warning that things may have to get worse before they will get better. 

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Everybody knew it but it took a while to become official. 
In the case of overstated Chinese GDP figures, we now got confirmation from the CCP’s mouthpiece Xinhua that they have been made up for a long period of time, at least on the regional level.
This is just short of the National Audit Office admitting GDP numbers are basically made up. Actually, according to a report by China Daily, the National Audit Office did just that as well, but didn’t release the report.  
The Chinese economy clearly is not growing at anything like 7 percent.— Wilbur Ross, WL Ross & Co

“One county in Liaoning reported annual fiscal revenues 127 percent higher than the actual number,” writes China Daily.
Xinhua on on the other hand quoted an official saying: “If the past data had not been inflated, the current growth figures would not show such a precipitous fall.”
According to China Daily local officials also manipulated investment figures and overstated them by at least 20 percent in the case of Heilongjiang province.
They just pretended even unsigned contracts where actual investments, whether real money followed or not.

“The official statistics have deep methodological problems; the departments are under-resourced. But what’s really the key here, is that the GDP number doesn’t really tell you much about growth across the economy,” says Leland Miller of China Beige Book, a research firm which interviews thousands of companies to keep tabs on growth and other metrics.
Well, according to official state media, a lot of that growth across the economy was made up, which is one of the reason why most investors and analysts also don’t believe the headline figure for the whole country. 
“Right now they’ve got an economy which isn’t growing at the 7.0 percent, it’s more like 1 or 2 percent. In Beijing they’re even saying privately 2.2 percent,” says Gordon Chang, author of “The Coming Collapse of China.”
GDP grew at 6.9 percent in the third quarter according to official figures.
Billionaire investor Wilbur Ross prefers to look at actual production and consumption data, rather than official data as well:
“The Chinese economy clearly is not growing at anything like 7 percent. We have felt for a couple of years that those figures were very, very generous. If you look at physical indicators—electricity consumption, natural gas consumption, oil consumption, cement consumption, steel consumption, telecom consumption, retails sales—if you look at all those indicators, none of them were growing at a rate that was equal to 7 percent and neither were the exports.”
So how fast is China’s GDP growing after all? Nobody knows for sure, but here are the six best estimates.
 

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