The Doomed Dragon: Is China's Economy Headed for a Crash Landing?

"China is growing too slowly and accumulating debt too fast. Its leaders have rejected fundamental reform. They still have the power to delay a reckoning but seem helpless to change the direction of events."

“Eye-popping.” That’s how David Dollar of the Brookings Institution described a recent Conference Board report predicting the Chinese economy would grow at only 3.9 percent between 2020 and 2025. Also stunning is the forecast of former Treasury Secretary Larry Summers. Summers and co-author Lant Pritchett, both at Harvard, coincidentally believe China will experience 3.9 percent annual growth over the next two decades.

China’s official National Bureau of Statistics estimates that the country’s economy expanded 7.7 percent last year. It’s hardly surprising, therefore, that Nicholas Lardy of the Peterson Institute described 3.9 percent growth, in the words of the Wall Street Journal, as “too gloomy.”

Despite what virtually everyone thinks, the 3.9 percent figures are wildly optimistic. China, at the moment, is in fact growing in the low single digits, if it’s growing at all, and it is heading into one of the biggest debt crises in history, if not the biggest. The shock of a Chinese collapse will roil the global economy. “China Is Very, Very, Very, Very Big,” Bloomberg noted last week, so when it falls the consequences will be very, very, very, very catastrophic.

How fast is China growing? The place to start is the official position of Li Keqiang, who as premier is in charge of the economy. In a speech last October, he said each percentage point of growth of gross domestic product produces 1.4 million jobs. Applying Premier Li’s formula to 7.7 percent growth, China should have created 10.8 million new jobs last year.

So how many jobs were in fact created in 2013? China’s Ministry of Human Resources and Social Security has the official number: 2.73 million.

Premier Li’s formula, applied to 2.73 million jobs, gives us 2.0 percent growth. The International Monetary Fund also has a formula, which results in a 2.2 percent figure. Morgan Stanley’s formula says 1.6 percent or 1.7 percent growth.

Despite almost nonexistent job creation—a 0.36 percent increase in 2013—Premier Li is not worried. In September at Davos, he said that in the first eight months of this year, China had created 10 million new jobs. If we take him at his word—1.25 million new jobs a month—it means this year China will create more than five times the number of jobs it created last year, even though the economy is now growing slower than last year. NBS reports that in the first nine months of this year, the economy expanded 7.4 percent, well down from 2013’s pace.

The 7.4 percent number is surely an overstatement, however. Electricity consumption, considered by many to be the most reliable indicator of economic output, was up only 3.9 percent for the first nine months of this year. Because the growth of electricity usually exceeds the growth of gross domestic product, the 2.0 percent number from Premier Li’s formula for last year looks close to the mark for this one. And electricity numbers have probably been artificially inflated upward, as they have in the past, according to the New York Times.

Analysts try to dismiss low electricity numbers by saying that the Chinese economy has transitioned away from manufacturing, where electricity is a good indicator of output, to services, where they believe it is not.

Let’s assume their contention is correct, even though manufacturing accounted for a still substantial 44 percent of the economy last year. Services, however, seem to be in trouble as well. Manufacturing services—freight and logistics—have to be stagnant because manufacturing is stagnant. Property, a main component of the services sector in the last several years, is headed for trouble with construction starts down 9.3 percent for first nine months of the year. They were up 13.5 percent in the same period in 2013.

Optimists also say that consumption is the great hope for the Chinese economy, but consumption appears to be falling. The key to understanding consumption is retail sales. NBS says such sales were up 12.0 percent in the first nine months of the year, but the official number, which is thought to include unsold inventory and government procurement, does not correlate with activity in the stores, especially the same-store sales of retailers with audited financials. In Walmart’s second quarter, its most recent reporting period, the international division had same-store sales growth in every country except China. Other retailers experienced falling same-store China sales in Q3, the just-completed calendar quarter.

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