Very interesting thread. Capital Economics says China’s GDP growth has been overstated by roughly 12% in the past five years – a very hefty number – while the San Francisco Fed accepts the numbers in aggregate but says Beijing has been smoothing out the data.

I don’t know enough to say whether either is true, but for me the biggest problem with China’s GDP growth data is that they do not have the same relationship to underlying economic growth that GDP growth data in other countries do, and so it is meaningless to compare...

Chinese GDP growth with GDP growth elsewhere.

While GDP growth in most countries is a measured output that depends on volatile real economic activity, Chinese GDP is an input into the economic process in which local governments are required to add whatever additional...

economic activity is needed to achieve the targeted GDP growth rate, whether or not this activity adds to welfare or productive capacity. Because they do not have to write down non-productive investment to nearly the same extent as in other countries (writing down bad...

investment reduces the value-added component of that period’s GDP calculation), they are able to "achieve" any GDP growth rate they want – although this growth rate doesn’t necessarily represent real underlying growth in the productive capacity of the economy to nearly...

the same extent that it does in most other countries.

During the three decades when reported Chinese GDP growth represented "real" growth in the economy, and it was unnecessary to force local governments to maintain the target, not surprisingly GDP growth always...

exceeded the target, and GDP growth rates were highly volatile. Once it no longer could do so, the best it could do was match the target, which it always did.


This of course explains much better why China’s GDP growth is so impossibly smooth than claims that China is somehow “cheating”, or purposefully smoothing out the data (why would they want to undermine their credibility by doing that?). Real economic activity is normally...

very volatile and reflects underlying conditions in the economy, while growth targets are determined politically. That's why input targets are always likely to be smoother than output.

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More from @michaelxpettis

16 Oct

Was import substitution really as much of a failure as Arvind Subramanian, and many others, seem to think? He says that after Raúl Prebisch argued for it in the late 1950s and 1960s, “Many developing countries consequently focused on their...


domestic markets — and fell further behind the west."

But it was really in the 1980s, after the LDC debt crisis, that these countries fell behind – before that the Latin American grew at roughly 5-6% for two decades – and I would...

say that the unsustainable build-up of a very inverted debt structure in the 1970s had far more to do with the need by international banks to recycle massive petrodollar flows than with anything intrinsic to the import substitution model.
Read 5 tweets
15 Oct

In the first few decades of the last century the international settlements in China – in places like Shanghai, Hong Kong and Guangzhou – became important Chinese centers of cultural, intellectual and scientific innovation (including as the...

birthplace of the CPC), perhaps because they operated within very different legal and political institutions. To a certain extent China’s Special Economic Zones of the 1980s and 1990s may have operated on similar principles.

I've always wondered – given the obvious political constraints within China – if the country wouldn’t do a better job of encouraging technological, cultural and intellectual innovation by creating similar “innovation zones” with different legal and local-political...
Read 4 tweets
14 Oct

This is a pretty good article about Beijing’s attempt – yet again but this time with more urgency – to rebalance demand domestically.


I think however that the article might downplay the most important point – the same one faced by every country that has had to adjust after an investment-driven growth “miracle”: while China must eventually rebalance demand away from investment and export dependence, and...

towards domestic consumption, this cannot happen except as part of a major social and political transformation.

That’s because there is no trick to rebalancing demand in China. It must shift income equal to at least 10-15% of GDP from businesses, rich people and the...
Read 8 tweets
13 Oct

I have no idea whether or not this “all-nation effort” will eventually be successful, but even if it is, until the project begins to produce more value than it costs it will absorb an enormous net amount of real resources – perhaps 1-2% of GDP for...


the next several years.

Those resources have to come from somewhere, either from households in the form of less consumption, from businesses and governments in the form of less investment, or from abroad in the form of a smaller trade surplus.

It would be best economically for China if the resources could come at the expense of non-productive state-sector investment (or real-estate), but because these investments are about generating employment – and I don’t think semiconductor research generates as...
Read 7 tweets
12 Oct

A little off my normal tweets, but I’ve already made reference here to Hiperson, one of my favorite young Chinese bands who just released their-widely acclaimed second album. They were in Beijing yesterday as one of the stops of their sold-out national tour and are off...

to Changsha tomorrow, but spent most of the afternoon and early evening visiting my place where we chatted about their plans, the ambivalence they feel about the huge sudden success of the Chinese indie scene, and about social and political...

conditions in China and the world.

It would be great if people with hardened attitudes about China and the Chinese knew about bands like this and now much they represent the uncertainly and idealism of many young Chinese. They were supposed to...

Read 4 tweets
12 Oct

China Beige Book is worried because “small and medium-sized companies are borrowing a lot less than they were in the second quarter.” I’ve been asked if this means that Chinese debt is likely to grow less quickly this year than expected.


No, not if we consider debt systemically, rather than in terms of linear increments. If China Beige Book is right (and I expect they are), less borrowing by SMEs to invest in expanding production doesn’t mean less debt overall. It just means a shift in the locus of debt...

creation from SMEs to the state sector—and almost certainly a worsening of the debt burden.

This is because to the extent that China has a politically determined growth target that exceeds the real underlying growth of the economy (which I would guess is negative...
Read 7 tweets

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