Over the last week the mainstream media has swept from one extreme to the other regarding China. First, we are told China’s economy was on the brink of a major downward correction. Now suddenly reported export numbers are unexpectedly high and all is well again. This almost schizophrenic change is perception exposes a few issues about China worth discussing.
First, most China observers would agree we cannot count on GDP as a true expression of production and consumption in China. In fact there is no valid measure currently in place to track China’s economic output. This is partly due to the massive size of the grey economy in China (this directly relates to domestic consumption). Back in 2010 Credit Suisse released a very good report on this question titled “Analyzing Chinese Grey Income”. In it they estimate up to 30% of China’s GDP may actually be unreported in grey income. With such a large percentage of income unreported there is a large ambiguity to Chinese domestic consumption measures. So when I am asked I always tell people use the restaurant index. This index unfortunately requires being in China, but has worked for most of the last fifteen years for me. The idea is simple, if there are lines and full restaurants across all socio-economic spheres, the Chinese are spending and the economy is good. If restaurants are partially empty in the densest parts of the city, even during high dining hours, the Chinese are not spending and the economy has slowed.
Second, the best way to see if China exports REALLY are growing is by looking at all the shipping indexes. If these all show an increase out of China, then there is indeed an uptick in exports. However, what products are being exported? Who makes those products? These are important questions as they matter to the overall economic health of China. If all the products are low cost made by coastal entrepreneurs this is supporting only a small percentage of the population. The same is true if the exports are all high ticket products made by State owned firms only. A blend of low ticket items, high ticket items and newer more technologically involved products means China’s economy is doing well.
Third, why can’t China be slowing down without being near disaster? Is the west so desperate that others share our bad news and times? The reality in China is actually very similar to here in the US. Without a radical change in economic policies things will neither vastly improve, nor slide off a cliff anytime soon. The policies that need to change are different, yet the outcome is the same. Continued economic disparity, growing wealth gap, and a slow boil until something happens that changes the balance.