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China: When Fake GDP Numbers Didn’t Really Matter

Aromatics, Business, China, Company Strategy, Economics, Europe, Polyolefins, Styrenics, US
By John Richardson on 21-Sep-2015


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WE all like to be proved right, of course, as it gives us that warm feeling of satisfaction inside – that sense of approbation.

And each us, even the most outwardly assured chemicals industry CEO, wants the acclaim of peers. No matter how much money we already have in the bank, and how many yachts in Monaco Harbour, this matters to everyone.

But what if the best route to the acclaim of your peers will in the future be by admitting you were wrong?

Professional suicide? No, not at all because as the New Normal develops, it is how we frame the debate that matters – and the debate has to start with the recognition that old ways of thinking need to be scrapped.

A classic case in point is the now mainstream recognition that China’s official GDP numbers are fakes. David Pilling in the 16 September issue of the Financial Times pithily wrote the following:

We have long grown accustomed to Chinese fakes. Fake watches. Fake DVDs. Even, recently, a fake Goldman Sachs. But what if something more fundamental were fake? What if China’s gross domestic product numbers were not all they were cracked up to be?  

For me, there is no “What if?”. As Li Keqiang said in 2007, official GDP numbers have always been “man-made” – and all the way back then he gave us the “Li Keqiang index”:  The way to measure real GDP growth in China, which is to look at electricity consumption, rail-freight movements and credit growth.

The thing is that in the past it didn’t really matter that much if you based your assessments of future chemicals demand growth on official GDP growth forecasts that were mysteriously almost always exactly accurate. If you were, say, three percentage points too optimistic in your prediction for 2005-06 styrene demand growth, the following year growth would probably exceed your expectations –indeed, everybody’s expectations – and so your reputation would be intact.

What’s changed is that China is no longer in the midst of a seven-phase historical “sweet spot” that led to the fantastic growth in demand for many chemicals and polymers, including polypropylene which I detail above. Here are these seven phases:

  1. In 2000, the flow of millions of migrant workers from China’s countryside to its big cities and towns was still gathering pace. This was a great demographic asset, as this labour oversupply meant that migrants were willing to work for very low wages. This enabled China to hugely increase its export-focused manufacturing capacity.
  2. Then came another major boost to China’s export competitiveness, which was its admission to the World Trade Organisation (WTO) in late 2001. Admission to the WTO meant the lowering of import tariffs on Chinese exports to the West. Quota limits on Chinese exports were also scrapped.
  3. Meanwhile, the West was enjoying very strong economic growth and so it could afford to buy lots more TVs, refrigerators and washing machines etc. from China. This was before the West’s Babyboomers started to retire in record numbers.
  4. China wanted to “sterilise” all the dollars it was earning from this booming export trade by purchasing US Treasuries, in order to prevent the yuan from rising too much in value against the greenback. Keeping the yuan weak against the dollar guaranteed further guaranteed strong export growth – and so more jobs for all those migrant workers. And with more jobs came much-stronger Chinese economic growth.
  5. As China bought more and more US Treasuries, this kept interest rates low in the US and so encouraged even more consumer spending.
  6.  This “virtuous circle” suffered a short, but very severe interruption in the few months immediately following the Global Financial Crisis (GFC). And, of course, the cause of the GFC was excessive leverage in the US housing sector which resulted from very low US borrowing costs.
  7. But then in late 2008, and lasting until the end of 2013, China launched a huge domestic economic stimulus package, which was designed to compensate for all the jobs lost as export trade to the West declined.

The big risk now is that those who missed the huge November 2013 historical shift will try to defend their positions with this old tried and trusted approach: “We will still be proved right, even if the reasons why we will be proved right are slightly different from what we had expected.”

A great example here is the debate over whether China’s GDP growth fully reflects the growth of its vibrant services sector. It probably doesn’t, but this still leaves us with two big, big problems, left over by the November 2013 historical shift.

Firstly, some provinces, such as Guangdong, will continue to enjoy soar away real GDP growth because they have booming services sectors and little of the heavy, old industries that are in real trouble today. Other provinces are, however, in much worse shape because of their reliance both on the old industries and on the real estate sector for their growth. So growth across China will be inconsistent and patchy.

And secondly, it was always wrong to assume that moving from one growth model to another would be almost as rapid as switching on a light. The “demand growth gap” – the replacement of lost investment momentum with new momentum from domestic consumption and services – was always going to take several years to fill.  What is new is that it has again become mainstream to acknowledge that this transition will be very difficult indeed, and will have major negative consequences for the global economy. For example, read this Martin Wolf article in the 15 September edition of the FT.

So let’s move forward in this debate. None of us are going to find all the right answers – and all of us will be wrong time and time again on the specific details. But it is, as I said, how we  first of all frame the discussion that will get us close enough to where we need to be five our ten years from now.