Friday, January 22, 2010

The Chinese scam

I’ve gone through GDP calculations many times in this blog but I think it is time to do that once more. Why? Because of China. China is, together with the insane spending-spree of all nations, the main driving force behind the supposed recovery. Partly thanks to the Chinese buying stuff Japanese GDP and German GDP went into plus.

Although true that China is doing better than many other countries, but how much of it is really real?

Let’s resume some of the facts.

China is a totalitarian country albeit so, so free comes to the economy and certain expects of everyday life, the government still completely resides over economic data and make most of the planning. The government also owns several large corporations within the building and banking sectors, which are the main sectors within any GDP calculation. In other words the Chinese have the means to fiddle with the numbers pretty much as they please.

Yes, there are outside firms, other governments, the IMF and many others keeping a close eye on things so any manipulations cannot be over the hill - that would be exposed. Assuming of course that there’s no conspiracy or other factors making any outside observers complacent.

They could, with this in mind, add or subtract a couple of percentage but not much more.

But why would they?

Well, why would any government hide real growth numbers? They all do you know, all of them. And when I say ‘all of them’, I really do mean that.

There’s power in showing good numbers. More investments will likely follow, people (even the poorer ones) feel more secure and get a sense of a bright future and we cannot overlook the psychological power of positive thinking. A government showing improvement in the economy is far less likely to be replaced, or in the Chinese case, overrun by upheavals. And lastly they can point fingers at others saying how good they are which all in all gives them leverage in any negotiations. Economic power is just as good as any standing army.

So there are many good reasons for the elite to show good GDP numbers.

But as said, the couple of percentage they could manipulate will not really do it. In order to reach real heights and really slap the fingers of others around the globe more is needed.

Believe it or not, but here comes the easy part.

Any economist or really anyone with the slightest understanding of GDP calculations can increase the growth at any given time with tens of percent. The problem is that such action would only be very temporary so in order to keep it low-key you cannot go that far, but a couple, maybe four fem percent wouldn’t be a problem, at least not until several years or even a decade have passed. And if you attract new investments and achieve some real growth during that time you can expand the scam for many more years.

This is what the Chinese have been doing. Well, your government does it too, but probably at a lower rate or in another way.

Let me shortly explain.

If a Typhoon hits the Chinese cost it will most likely be beneficial for GDP. They need clean-up crews picking up debris; they need hospitals working harder, new buildings need to be built, new cars to be bought, insurance companies will pay out lots of money, banks lend to clients who have lost their homes, and so on and so on. The same goes for snowstorms, tornadoes etc. All in all, most, of not all, natural disasters are good for GDP.

But government cannot sit around waiting for such events, they need to go out and create their own growth. This they can do in a million different ways. They can tear up roads and build new ones, they can expand the military and build more nuclear weapons, and they can have people digging holes in the ground or collecting pinecones. Any activity within the economy CAN be used to increase GDP.

How many hundreds of billions don’t you think this town costs?

You haft to realize that the Chinese government is not only governing a large country with a very diverse populace, they are also facing huge wage dissimilarities (not good in the socialist world) where a large portion of the populace is still in deep poverty. In addition to this China has a problem with fresh water supplies and has very little oil. They are facing overpopulation problems in some areas and the complete opposite on others. They also have conflicts within and then not only the Tibetan situation. Independent surveyors have calculated that there were as much as 70 000 larger disturbances and riots during 2009 alone. Generally speaking, if it wasn’t for the economy growing, the problems may very well lead to civil unrest or even worse.

So when we are hearing about the Chinese miracle or our journalists tell us how great china is, take that news with a large shipment filled with salt. I’m not saying China is in big trouble, they are still moving alone despite the continuing fraud with GDP, but they do have their problems and sooner or later the bill for all this over excessive spending will be up for payment.

Many pundits argue that China will continue to grow and become the world’s leading power very soon, and although that may be true, I hardly see how it can last. Up like a sun, and down like a drunken Gordon Brown.

So is it a giant Chinese bubble? Oh hell yeah, but not any worse than much of the rest of the crap that is going on. They will crash and burn with the rest of us.


  1. I can't really agree China does have many internal problems but all nations have had them as they progress, the US had all sorts of problems, revolution, civil war, killing the original inhabitants, new yorks near bankrupcy in the 70s. There are lots of challenges to every nation, but that doesn't mean the nation can't face them and emerge a superpower.

    Using the statement "Up like a sun, and down like a drunken Gordon Brown." doesn't necessarily convince anyone but assumes the person reading it doesn't like Gordon Brown and also think he is to blame for bad finances/social inequalities. You'd be better to give a reference point that all can agree is an accepted measurement of complete failure that everyone can agree with.

  2. Although I agree with the reference point point you make, I'm not sure what you're trying to say. I think I make it pretty clear that China has many and big problems, but they are not close to what UK, US, Ukraine, and many others have.

    The main point I try to make in this post is how they fool around with GDP numbers. Most people, including economists and politicians don't understand this.