The endless running commentary on every moment of the economic activity in China has become a virtual industry in itself. The current bears vs bulls shouting match about Chinese economic growth turned out as a stampede to the obvious – A restrained, but quite respectable and at least plausible, growth rate of 7.4%.
The bears instantly labelled it the lowest since 1990, and claimed it proved their point. The bulls didn’t care what it proved, because it proved them right in theory. The question of whether grown adults expecting infinite double-digit growth is even theoretically sane has yet to be asked. The short answer is no, it isn’t.
The main methods of “prediction” are indices. There’s no lack of abysmally conventional thinking and uninspiring tat in market methodologies when analysing China. Whatever your analysts learned 20 years ago is how you’re still expected to read figures. The deep rut into which analysis of China has gone is an indicator in itself, and not a reassuring one.
The standard range of indicators includes cement, electricity, and other in-good-faith sources of measuring some forms of China economic activity. Trouble is that there’s a use-by date on these indices.
Aspirations and snakes in the market
The new economic model for China is far more complex. The world’s factory is trying, quite rightly, to create more depth and scope in the domestic economy. Raising the standard of living means creating a truly advanced economy, not the 21st century version of a 19th century purely industrial economic model.
China has more to think about, and greater aspirations, than merely providing foreign analysts with nice numbers. Not least its financial sector, which has all the subtle refinement of a hail of chain-saws. The Chinese black economy shadow banking and bad debts have been in the news for a while.
What hasn’t been in the news is the connection between the black zone and the mainstream economy. This issue is exposure, and exposure to what? It’s not clear how much exposure qualifies as fatal. China could be far more effective and decisive in dealing with credit issues, too, as recently proven by Beijing’s big strikes against dubious lending and borrowing practices.
Growth = Risk
The notion here is that Beijing is reminding the market, after many tactful kicks in the selectively thick head of Chinese credit, that it calls the shots. The chances are that this very necessary response may cause a contraction, or even rational thinking, in the wider Chinese economy. That means less growth, but less risk. More growth, however, does mean more risk. It’s a possibly deadly relationship between something everyone wants and something everyone fears.
The equation “Growth = Risk” is a very tricky proposition for the global economy. The world has developed the bad habit of using increasing prices and inflation as a measure of growth, which they’re not. The theory is prices get valued by demand. They don’t. They’re managed by a culture of gouging. This culture has done very nicely in the Shanghai property market and elsewhere for nearly a generation.
However – Asset values, based on inflated prices are risks, particularly if capital availability reduces. The current hits on margin lending apply to investors, but it’s not hard to see the principle expanding to property and other big-ticket credit. This sector involves trillions of Yuan, and those Yuan have friends.
(Interestingly, the global financial markets have been staging a rather timid “Ummmmageddon” about this well-known hundred trillion ton might-be spanner in the works for some years. They don’t necessarily get the ramifications; they can’t influence the issues; and they sure as hell can’t quantify the risks. So they “Ummm and bitch about a few percentile points. Spectacularly useless, but this is the driver for market predictions.)
Deflation, doom and delirium… Nice to have a choice
The next equation, “Risk + Debt + Deflation = Trouble”, requires no introduction. Sad to say, the mournful warnings against deflation of prices, even these very inequitable prices, are right. This means someone has to carry the can if asset values go down, and China’s exposure to overvalued assets can reasonably be said to get severe.
Now, a reality check – In the midst of this cat-fight with its own economy, China could be expected to produce stellar growth every year? Never mind reality, actual assets, debts, iffy prices and bizarre theories, the markets want “nice numbers”. The markets apparently don’t seem to mind that the numbers have to dodge all these apocalypses to show up looking “nice”. Predictions get made, like Chicken Little was giving classes or Ayn Rand was running for president of the USA.
So what indicators could you read?
The best indicators aren’t even economic or financial. They’re social:
- Fear: The driver for most market moves, 1 point of fear = 10 points of greed.
- Bull: The more implausible a commentary or piece of information, the more likely that the subject sector is highly infected with false information.
- Evasion: When a subject gets dodged by everybody, it’s extremely dangerous.
- Over promotion: If someone “endorseth too much”, and every twitching little hack pundit says “the smart money is on…”, join a monastery before investing in it.
- The Chinese themselves: There are 1.4 billion Chinese. They’re very nice people; they have 5000 years of truly fascinating history. They are occasionally stark raving mad, but when they all clearly despise something or someone, you know it’s bad.
Failing that, use real tea leaves. It’s cheaper and probably as reliable as external China-watchers.