My colleague at BOOM Finance and Economics posts a weekly editorial Hat Tip: Gerry: http://boomfinanceandeconomics.com/#/
BOOM seeks out the very best information from authoritative sources and strives for consistency in its quality and trustworthiness. In evidence of this, BOOM has developed a loyal readership which includes many of the world’s most senior economists, central bankers, fund managers and academics. We strive to always have good relationships with our readers. If you want a real edge in understanding the complex world of finance and economics, subscribe to BOOM as a Follower on LinkedIn or as a Subscriber (Free) to the BOOM Newspaper at http://boomfinanceandeconomics.com/#/
THIS WEEK’S EDITORIAL
FOCUS ON CHINA OVER 10 YEARS: The Chinese economy is a mystery to many observers. Many experts continually predict the fall of the Chinese economy. They say it is fragile, that it will collapse due to a heavy burden of debt, that it is too heavily controlled, that it is not open enough, that it “manipulates” its currency.
In 2015, a China “expert” wrote “having been the locomotive for global growth following the financial crisis in 2008, Chinese growth has now slowed and its economy is looking increasingly fragile.” BOOM has lost count of the number of times such sentences have been written by so-called economic experts on the subject of China. Lack of democracy is often referred to as a cause of imminent demise. Other explanations include lack of property rights (especially in intellectual property) and loss of talent to the US. On and on they go, forever predicting the end of the China economic miracle.
And yet, China continues to grow and to provide improved living conditions for its people. Its currency is exactly where it was 10 years ago in relation to the US Dollar. In that same time frame of 10 years, its annual GDP growth has averaged around 7 % p.a. and its GDP per Capita on a Purchasing Power Parity basis (PPP) has doubled — again showing a growth rate of about 7 % p.a. Its annual CPI inflation rate has averaged around 2 %. Its Core inflation rate has averaged 1.5 %. The Minimum Wage has doubled, as has the Average Wage while its unemployment rate has been steady and averaged around 4.5 %.
Exports have doubled in US Dollar terms. Imports have grown but have not doubled, increasing by about 65 %. Tourism revenues have tripled. The Government’s Budget Deficit has averaged around 2 % of GDP. Military expenditures have grown also by 7 % p.a. but are still relatively modest compared to the US. US military spending is estimated to be currently around US $ 750 Billion annually. China’s is estimated to be around US $ 250 Billion.
Business confidence measures are very stable as is capacity utilization. Car production and car registrations are stable. Cement production is stable. Electricity production has doubled. Steel production has doubled.
Consumer Credit has surged fivefold, reflecting a stong growth in consumer confidence. Disposable personal income has doubled. Household debt to GDP has doubled. Gasoline prices have almost halved.
Government Debt to GDP has doubled, again revealing a 7 % p.a. growth rate but is still low by international standards at around 68 % of GDP. Gold Reserves have doubled. Its 10 year government bond yield has averaged around 3.5 % (currently 2.848 % with a positive yield curve right out to the 30 year yield at 3.42 %).
So — it all looks very stable and well managed. Next time you see an article predicting the “imminent collapse of the Chinese economy”, take a deep breath and wonder about the author, not the Chinese economy.
CHINA BOND MARKET: How does China finance its economy? Interestingly, it does so overwhelmingly via new bank loan creation. The annual bank loan growth rate is around 12 % p.a. The total bond issuance in China is estimated to be around US $ 15 Trillion. The US market is estimated to be US$ 50 Trillion. BOOM regards the Chinese market as not a large domestic bond market in comparison with the US and especially in regard to its population which is around 5 times larger than the US.
Some people point out that China’s bond market is the second largest national bond market on the planet. However, being the world’s second largest market does not make it “large” relative to the US market or its huge population.
China has cleverly avoided bond issuance as a major financing methodology compared to the US, relying instead on the issuance of new bank loans. And that has been a good policy because they seem to appreciate the subtle fact that bond issuance ensures the flow of finance but without any correspondent increase in the supply of new money.
This has become America’s Achilles Heel in regard to financing its economy. The US must wake up to this point. The US economy is being relatively starved of fresh new money via bank loan creation. The size of the US bond market relative to its GDP is the problem. As a result, economic growth is stagnant.
The US bond market is more than twice the size of its GDP. The Chinese bond market is approximately equal to its GDP. Therein lies the problem for the US. They need more fresh new money via well-regulated bank loan creation and, especially, via new cash issuance.
They must stop their obsession with bond issuance.
By the way, Japan’s Bond Market is around US$ 13 Trillion (with a population of less than one tenth that of China). The Emerging Markets nations combined actually have a total bond issuance of more than $ 15 Trillion. That is more than Chinese bond issuance.
THE RUSSIAN ECONOMY OVER 10 YEARS: Let’s take a look at the Russian economy. Over the last 10 years, its currency has depreciated steadily in relation to the US Dollar (halved). In that same time frame of 10 years, its annual GDP growth has averaged around 2 – 3 % p.a. over the last 10 years but its GDP per Capita on a Purchasing Power Parity basis (PPP) has barely increased, which means its people have not seen any large improvement in living conditions. Its annual CPI inflation rate has averaged around 6 – 7 %. Its Core inflation rate has also averaged 6 – 7 %. The Minimum Wage has tripled while the Average Wage has doubled. Its unemployment rate has been steady and averaged around 5.5 %.
Exports have halved in US Dollar terms (bear in mind the currency has depreciated by a similar amount). Imports have been relatively stable in US Dollar terms. The Government’s Budget Deficit has averaged around 1.5 % of GDP. Military expenditures have grown marginally from around US$ 50 Billion p.a. to about US$ 65 Billion but are still modest compared to the US and China. As previously noted, US military spending is estimated to be currently around US $ 750 Billion annually while China’s is estimated to be around US $ 250 Billion.
Business confidence measures are moribund as is capacity utilization. Car production has fallen marginally. Total vehicle sales have fallen by about 20 % in total. Cement production is stable. Steel production has increased by about 20 % in total annual production, revealing poor growth in industrialization and construction.
Consumer Credit has surged fourfold but consumer confidence has fallen significantly. Household debt to GDP has doubled. Gasoline prices have fallen by 40 %.
Government Debt to GDP has doubled, revealing a 7 % p.a. growth rate but it is still very low by international standards at around only 18 % of GDP. Its 10 year government bond yield has averaged around 8.5 % and is currently 7.03 % — reflecting the weakness of the currency over time.
COMPARISON: If you compare the Chinese economy and the Russian economy over the last decade, it is clear that the management of the Chinese economy is far superior to that of the Russians. Russian living conditions are not rising anywhere near as fast as those of the Chinese people. China has the advantage of a large manufacturing sector while Russia has abundant energy and commodities. Both nations should work together more closely to take advantage of their respective economic strengths. But that is easier said than done. Perhaps the Belt and Road strategy being adopted by China as it moves its industrial focus more towards the west geographically will benefit Russia over the next decade. However, Russia must grasp this opportunity or else it may find increased prosperity for its people to be an elusive goal.
In economics, things work until they don’t. Until next week ………… Make your own conclusions, do your own research. BOOM does not offer investment advice.
SUBSCRIBE — FREE AT THE BOOM NEWSPAPER: http://boomfinanceandeconomics.com/#/
CLICK HERE FOR PODCASTS: OUR BRAVE NEW ECONOMIC WORLD
EMAIL: gerry {at} boomfinanceandeconomics.com
Disclaimer: All content is presented for educational and/or entertainment purposes only. Under no circumstances should it be mistaken for professional investment advice, nor is it at all intended to be taken as such. The commentary and other contents simply reflect the opinion of the authors alone on the current and future status of the markets and various economies. It is subject to error and change without notice. The presence of a link to a website does not indicate approval or endorsement of that web site or any services, products, or opinions that may be offered by them.
Neither the information nor any opinion expressed constitutes a solicitation to buy or sell any securities nor investments. Do NOT ever purchase any security or investment without doing your own and sufficient research. Neither BOOM Finance and Economics.com nor any of its principals or contributors are under any obligation to update or keep current the information contained herein. The principals and related parties may at times have positions in the securities or investments referred to and may make purchases or sales of these securities and investments while this site is live. The analysis contained is based on both technical and fundamental research.
Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.
Disclosure: We accept no advertising or compensation, and have no material connection to any products, brands, topics or companies mentioned anywhere on the site.
Fair Use Notice: This site contains copyrighted material the use of which has not always been specifically authorized by the copyright owner. We are making such material available in our efforts to advance understanding of issues of economic and social significance. We believe this constitutes a ‘fair use’ of any such copyrighted material as provided for in section 107 of the US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed without profit. If you wish to use copyrighted material from this site for purposes of your own that go beyond ‘fair use’, you must obtain permission from the copyright owner.
That’s some very interesting stuff Peter.
China versus Russian economies are truly different and a lot different from what we are told by the experts
Yes, Steve, China claims they have ‘socialism with Chinese characteristics’ but I’m not sure what the ‘characteristics’ are – they are definitely not what I generally understand as communism.
well, china is the mother of all bubbles, and russia is post-collapse.