By John Richardson
“BY NOW I think most folks are aware of and agree with the blog’s views on China,” a chemicals industry source said last week.
“The only things that no one seems to know for certain are 1) how bad will it get before it gets good? 2) To what extent can the current government allow it to get bad even if they know it is for the longer term good? and 3) will the government blink too soon when it gets bad and pull back on some of the reforms?
We will try and answer these three questions in a series of blog posts this week.
And so today, in order to begin to answer “how bad will get before it gets good?” see above an important reminder of a chart compiled by veteran metals consultant and China macroeconomist, Simon Hunt.
The chart begins n 1991 and shows nominal GDP (dotted blue line) and a GDP deflator (red).
Nominal GDP is total output before adjusting for inflation, and the GDP deflator then adjusts for inflation.
The black line shows official GDP growth and the green line is real GDP growth, once this deflator has become taken into account.
As you can see, China, has been in recession three times in recent history:
- In 1993, as Deng Xiaoping’s economic reforms accelerated, particularly involving the heavily indebted and hugely inefficient state-owned enterprises, real growth fell into negative territory.
- On the next occasion China suffered negative real growth – as opposed to the now harmful and distracting fiction of official GDP numbers – was in 1997-1998, during the Asian Financial Crisis. No country is an economic island, especially China, which at this stage in its development had become much more integrated with the global economy.
- Then came the global financial crisis by which time China was, of course, much more integrated with the global economy, as it had become the world’s workshop.
It seems obvious to us, therefore, that another period of negative real GDP growth is inevitable.
So prepare for this first of all – and prepare for this no later than 2015. The data points to this happening as early as Q4 this year and if not then, certainly in 2015.
This post only partially answers the question “how bad will get before it gets good?”
We now need to consider the extent and the depth of negative GDP growth, and its full implications for the global economy.
This will be the subject of our blog post tomorrow.