This article first appeared at The McAlvany Intelligence Advisor on Monday, February 9, 2015:
Nearly everyone has an opinion about forecasting and its dangers. Some, like Yogi Berra, will tell you, “It’s tough to make predictions, especially about the future.” Others, like John Kenneth Galbraith, will say, “The only function of economic forecasting is to make astrology look respectable.” Still others will warn about setting either the exact event, or its timing. Do either one, they say, but not both.
Apparently the forecasters enlisted by the Wall Street Journal last week to give their best estimates of growth in China weren’t listening, or didn’t care. Or perhaps they believe in Keynesian miracles alongside those of the Tooth Fairy.
Nevertheless, when asked about import and export growth in China for the month of January, they missed reality by a country mile. The Journal tallied up the results and their seers and prognosticators concluded that China’s export numbers for January would be a positive 4.3% over a year ago. Instead they came in at a minus 3.3%, a full 7% off the mark. More embarrassing were their predictions on imports: the seers saw a slight 3.3% decline but reality checked in with a heart-thumping drop of 19.9%.
Overall China’s economy turned in numbers that haven’t been seen in a quarter century: GDP growth at just 7.4%, with each of the last two quarters of last year coming in below that, presaging further declines in the immediate future.
Part of the difficulty, of course, is the widely-held distrust of any numbers emanating from China. The perception is that ever since they got rid of the Gang of Four in the 1970s, everything’s been doing just great: the free market reigns, the average Chinese citizen is buying new cars faster than they can weld them together, affluent Chinese investors (there’s an oxymoron for you) have been buying up houses and apartments to save for their retirement, and overall the country’s economy is now either Number Two in the World (with the US at Number One), or vice versa.
The reality is much different. What’s hard to explain is how the Journal’s gaggle of guessers got it so wrong. Some hold that it’s the strength of the dollar which is making exports more expensive. Some are blaming the excessive real estate development which has resulted in more than 60 million empty apartments just waiting for buyers. Others are saying that it’s the industrial sector with capacities more than 40% ahead of demand. All of which, if the numbers are to be believed, has resulted in a debt-to-GDP ratio of an astounding 250%, on a par with Japan.
No one wants to suggest that it’s how the communist-free marketers are running the place, using an odd and predictably unreliable mixture of free market decisions and Keynesian stimulus programs. In the beginning, when China’s communist leaders were dismayed at being left behind by its neighbors in the mid-’70s as a result of policies imposed by the Gang of Four, they decided to try a little free enterprise. Loosening the state’s noose by allowing state-owned companies to operate under modified free market principles and farmers to keep what was left of their products after paying off the state, the moribund economy began to improve.
The numbers in the early going were very impressive. The rule of sevens took over: With the economy growing at more than 10% a year, the country’s GDP was doubling every seven years. It grew at more than double digits for nearly a quarter of a century, right up until 2012, when, horror of horrors, it started slowing down.
It started off on the right foot. As the Wikipedia entry about China’s economic history (written obviously by a Chinese apologist) noted:
The purpose of the reform program was not to abandon communism but to make it work better by substantially increasing the role of market mechanisms in the system and by reducing – not eliminating – government planning and direct control….
The [new] system allowed individual farm families to work a piece of land for profit … this arrangement created strong incentives for farmers to reduce production costs and increase productivity….
[It also] allowed enterprises to produce goods outside the plan for sale on the [private] market, and permitted enterprises to experiment with the use of bonuses to reward higher productivity….
Individual enterprise also was allowed, after having virtually disappeared during the Cultural Revolution, and independent cobblers, tailors, tinkers, and vendors once again became common sights in the cities.
But things got out of hand. Without the checks and balances built into a true free market economy, backed by the rule of law, the economy started blowing bubbles. And as with soap bubbles, they began to burst. Real estate started slowing, along with industrial and manufacturing production.
Enter the Keynesians. Interest rates were reduced with the hopes that cheaper money would entice more borrowers to borrow, more lenders to lend and more buyers to buy. Nothing of the sort happened, of course, but it’s understandable. None of the texts written by Austrian economists like Tom Woods, which explain accurately how the same thing happened here, have been translated into Chinese!
One observer with his head on straight is, rather inexplicably, Chinese: Minxin Pei. Despite being handicapped with a degree from Harvard, Pei now professes at Claremont McKenna College and is a keen and accurate observer of what’s really going on over there:
Since recording its last double-digit growth (10.4%) in 2010, the Chinese economy has effectively decelerated 30% in five years. Most of the slowdown occurred in 2011 and 2012 when reported growth was 9.3% and 7.7%, respectively….
But the slowdown of the world’s second-largest economy is far from over….
Even with last year’s 4.5% drop in housing prices – the first in two decades – the unraveling of the overbuilt real estate sector has hardly begun. More than 60 million empty apartments await buyers, and the residential housing market is essentially comatose.
[Since] the real estate sector accounts for between 25% and 30% of China’s GDP … it is impossible for the Chinese economy to regain momentum without reviving this vital industry.
But, given the political nature of the communist empire there, how is this going to happen, exactly? Answers Pei: it isn’t:
Unfortunately, this is not going to happen. These measures … crucial to long-term growth, will likely cause an outright recession. For a leadership team that is up for reappointment in 2017, China’s government will do just about anything to avoid this.
According to another outfit dedicated to forecasting the impossible, the International Monetary Fund, China’s growth this year will drop to 6.8% and 6.3% next year. If Yogi Berra and John Kenneth Galbraith are right, the IMF will join the crowd of predictors and prognosticators who will be wrong once again when the real numbers come in.
The Wall Street Journal: China’s Exports Post Surprise Drop in January
China’s economic history (warning: Chinese apologist wrote this)