As members are aware, not long ago the US Department of Justice said that our INVNT/IP research on China's national business model represented the best understanding of how China makes money.

 

Members will also know that SNS announced the Chinese recession in January, 2015.  We backed this call with various pattern-breaking behaviors by the Communist Party Standing Committee over the next few years, and eventually got to the point at which, admittedly by our own best estimates, we could (and can) describe meeting dates of this group when they were getting frightening briefings on their failure to remedy the internal economic crisis.

 

In SNS and in briefings to INVNT/IP members, as well as to government officials in the Inventing Nations, we have shared estimates for real China GDP growth that were, in the least, recessionary (defined as two declining quarters in sequence), but by our estimates were much worse.  In our view, not only were the government GDP growth figures massively overstated for this period; we continue to think that, at least for some periods and geographies, the economy was contracting.  Mathematically, this means there would be a negative GDP growth figure for those times and or provinces; we have been suggesting something between -2.0 and -4.0%.  This is a far cry from the obviously-smoothed announced figures, which continue to hover around 6.7% (the latest being 6.9%).

 

This week, the story finally broke in the mainstream press, with stories in both the Financial Times and the New York Times.  Both subscribe to SNS.

 

In an article headlined "China Fake Data Mask Economic Rebound," on January 15, the FT reported the earlier fraudulent reporting vs. a current debt-fueled rebound:
 
"The main factor masking the recovery is a slump in northern China from 2012 to 2016 that was never fully recognised. Three regions admit to faking some statistics in 2016 but FT analysis suggests the impact was deeper and longer than a single year of faked data would suggest.

 

"That matters, because China is on course to become the world’s largest economy by any measure. If the country’s data are skewed, so are the responses by governments, companies and institutions the world over."

 

Last summer, at the Aspen Ideas Festival, we talked with FT Americas Managing Editor Gillian Tett, who has been doing her own excellent work on the growing national debt of China.  We suggested that this was the result of a great recession, beginning on our about January, 2015.

 

In fact, tracking the national debt, itself a clearly-imperfect annual figure, has provided solid (if understated) proof of this recession.  A quick review shows a marked increase in overall debt starting around 2012, and then accelerating, headed perhaps out of control, starting in the 2015 timeframe.

 

Yesterday, the New York Times published a story titled, "China's Economic Growth Looks Strong.  Maybe Too Strong." In this piece, journalist Keith Bradsher notes:

 

"The pace of growth in China’s economy accelerated last year for the first time in seven years as exports, construction and consumer spending all climbed strongly.

 

"At least, that’s what the government says.

 

"In reality, the pace of growth in China’s economy is anybody’s guess. Various signals suggest China’s growth did speed up last year, which could give the government the room it needs to tackle an accumulation of serious financial, environmental and social problems this year.

 

"But measuring the size and health of the world’s second-largest economy can be difficult at best. Its official figures have become implausibly smooth and steady, even as other countries post results with plenty of peaks and valleys. Officials in far-flung regions are admitting their numbers are wrong. And outside experts crunching the data have come up with different — and usually weaker — results."

 

For years, specialists have noted that the national GDP is based on provincial reports, in an environment that rewards local leaders for inflating numbers, which often are so overblown they need to be knocked down prior to release. Bradsher provides some old and new data on this practice:

 

"Increasingly, China is owning up to data shortcomings, particularly in provincial data. The region of Inner Mongolia revealed this month that two-fifths of the industrial production it reported for 2016 did not exist. A year ago, Liaoning Province in northeastern China revealed that local governments had padded their economic growth statistics from 2011 to 2014.

 

"Tianjin, a sprawling metropolis, briefly posted on one of its official websites last week that previous data had been inflated. The post was quickly deleted."

 

But this has masked the much more important issue of China's actual economic performance, from 2012 until now. With provinces admitting that 40% of industrial output figures were faked, the real question of any link between published figures and reality seems to become nothing more than aspirational.

 

Has the Communist Party masked real GDP growth failures with debt-based spending?  Absolutely.  Has the Party also used property bubbles and other obvious schemes, while shifting debt sources (from government to consumers, from major public works to condos and fraudulent wealth management instruments) in order to play a shell game in GDP reporting?  Yes.

 

It would seem that now, with major news media joining their voices to the story, we have the beginnings of mass media confirmation, and most likely a longer thread of future discoveries underlying the real numbers.

 

Is GDP growth high, if, for instance, 100% of it comes from debt?  Chinese leaders would say "yes."  One Hong Kong analyst noted that the government continually revises its definition of GDP content to suit the needs of the moment. 

 

We, on the other hand, would say, "no." 

 

Why does this matter?  If other countries and companies saw China as a basket case, everything from the Belt and Road economic colonialism program to global Renmibi acceptance would take a hit.  Trade deals and international banking organizations would respond differently to a failing model propped up with unsustainable debt growth, vs. the current fantasy of unbridled success.

 

And domestically, instead of the shining economic triumph Xi has portrayed as his core legacy, in the latest Congress that embedded his name and thoughts in the national constitution, you might have Politburo rebels looking around for a new leader.  Perhaps this is one reason he imprisoned many potential successors on the run up to last fall's event.

 

In summary, we are proud to say that we were able to share the truth about China's economic performance with our members, on an issue that may become one of the most important of the decade.  The emperor, it turns out, is Chinese, and he has no clothes.

 

Your comments are always appreciated,

 

Sincerely,

Mark Anderson
CEO
Strategic News Service