Chinese Economics Thread

[Serb]

The world bank economic update I shared had this - the return on those LGFVs in aggregate are below the cost of said asset backed debt.

The returns could be lower if you factor in that SOEs that manage various infrastructure operations financed through LGFVs often leave a huge consumer surplus and don't price their services as much as they could due to China being a very socialist country in the end.

However, that doesn't mean that those assets are overall worth little, it is just that they are purposefully choosing to price their use much less than their true value.

In a case of liquidation, let's say hypothetically that some private creditor takes some of those assets from the state, he could then in turn price it higher and start making profits and generate returns that would signify its true value being much higher than public pricing of services would suggest.

Or the SOEs themselves could raise prices for various infrastructure-related services to repay interest easier if the need for so arose, but I don't think that they will do that, nor do I think that it's realistic that any private creditor end up with those assets, it's not that serious.

You should also consider that most of that infrastructure could last for decades, or even hundreds of years in some cases, whereas their interest rate repayment periods are much shorter, so this also increases their overall valuation, not just their short-term yearly profits.

And even this model worked surprisingly well so far since its creation, I mean even with leaving those huge consumer surpluses, the LGFVs still managed to float freely and repay all of their debts on time.

However, due to the global slowdown in economic activity (sparked first by Covid and then the West), and domestic real estate problems (LGFV's main financing method) in China, some problems also arose in LGFV operations.

However, even then, none of the LGFVs defaulted, because all of that debt is internal inside the country and is currently being restructured easily, and the government currently helps some of its repayment, until everything picks up again, and those operations stabilize.

So, to summarize, neither those infrastructure assets were bad investments, nor will those LGFVs start defaulting. If you look at indirect economic and social returns, then those assets are even more valuable.

It's perfectly understandable why would they be built. It's not like the US when you have much more debt, but shit infrastructure compared to China, because the debt goes all for short-term spending.

And you also need to consider one more thing. Some infrastructure that becomes profitable far into the future from its completion like HSR is at its zenith currently in China.

Its revenue/ridership usage often grows the more time passes due to network effects (the more track of them you build, the more they are all used), also the near-related economic activity takes some time to kickstart (like various commercial projects that take advantage of them both in and around the assets), and generally the higher GDP per capita grows, the higher the ridership affordability will become.

 

[Serb]

Likewise, I agree with your point as well.

If he bothered to read my posts, I never compared the entirety of the Chinese economy with that of the US economy. I am merely pointing out the ludicrous nature of the claim that "inflation in other currencies do not impact China".

Sinopec and PetroChina imports petroleum in USD from Non-Russian sources (and in USD from all sources before the war) - when the price of oil goes up in USD terms, Sinopec and Petrochina have to raise prices or lose money. Your argument here would be akin to claiming that gasoline/polyethylene/polypropylene prices in China do not fluctuate when global oil prices move.

When COFCO imports soybeans from the US it pays for it in USD, your argument here would be as stupid as to claiming that soybean and therefore beef prices in China do not fluctuate when global soybean prices move.

When ENN Energy imports LNG using a J-curve based off of Brent, or straight up with a processing fee added onto Henry Hub, your argument would be as dumb as to claiming that natural gas prices in China do not fluctuate when natural gas prices globally fluctuate.

When Baowu steel imports coking coal or iron ore from Australia they do so in USD, your argument would be as dumb as to claim that when iron ore or coking coal prices fluctuate in USD that steel prices in China do not move.

And how did all of this exactly impact the Chinese economy, when it didn't even raise the Chinese inflation rate above 0.3%, not to mention slowing economic growth?

Shouldn't have weakening of the RMB against the USD exchange rate result in impacted imports of those firms, especially in such crucial sectors firms that you listed which are also central to the economy, hence transferring some of the costs to consumers and the increasing inflation level in the broad economy?

If it didn't even manage to do that, then your point is even of lower significance. I'm not saying it's 100% insignificant, but it's closer to that.

However, how come we see none of that, and inflation remains at 0.3%? So, as you see, it's really not that significant matter, at least not here.

Well, one of the reasons is that you may also need to update your data, Chinese trade in yuan nowadays exceeds the dollar trade - it's at 49%.

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Yuan-denominated international payments last quarter grew 11% on the year to $1.51 trillion, while dollar payments shrank 14% to $1.4 trillion, the first quarter in which the Chinese currency pulled ahead in data going back to 2010.

And see the trend the best here, the dollar is becoming more and more insignificant in China's trade:

So, I would argue that USD-denominated China's GDP is not only completely useless in measuring the different strength/performance levels of various economies, but that the short-term USD/CNY exchange rate fluctuation itself is also of very low importance for evaluating/impacting it.

 

[Arij Javaid]

Inflation in other currencies have minimalistic impact on china as china runs an annual trade surplus of $800-900 billion. The only effect is the shrinking of the surplus, but the surplus is so huge that it doesn't matter alot.

Also, why are people on this forum so obsessed with measuring economy in nominal dollars?? If China wishes, it can pump all the surplus money from trade into market, raise interest rates, align fiscal policy and remove undervalued cap to boost the yuan which would make China's nominal GDP exceed the US. But that doesn't mean that overall productivity has increased or the quality of life of Chinese citizens have increased.

China has a GDP of $35 trillion in purchasing power and overall a far larger real economy than US.

 

[Serb]

Here's a clear logical overview of why higher nominal GDP (or any kind of GDP) = higher standard/quality of living. It can be quite the opposite. This is why it is easier to rely on other metrics like the happiness of citizens, various support/approval of government ratios, depression/mental problems, suicide ratios, polarization levels, expectations of the future, democracy perception index, various other satisfaction rates, crime, etc.

https://twitter.com/i/web/status/1752705390557716573

China offers some services from the public sector for free or cheap, instead of private actors doing it for expensive, making its GDP lower in accounting. But that doesn't mean that their economy is worse, it just means that their citizens have a higher quality of life/happiness.


Also, there is this: "Appear weak when you are strong, and strong when you are weak.", "All warfare is based on deception." - Sun Tzu.


It's quite easy to understand why China doesn't include rent imputations in its GDP accounting method, and why it relies mostly on the old Soviet-era Material Product System (MPS) method for counting its GDP. Why are the free/nearly free government socialized benefits not accounted for at all, etc? If I were to speculate, I say that China's real economic power/GDP is about 2X of the US, just like its electricity use.

 

[chgough34]

Here's a clear logical overview of why higher nominal GDP (or any kind of GDP) = higher standard/quality of living. It can be quite the opposite. This is why it is easier to rely on other metrics like the happiness of citizens, various support/approval of government ratios, depression/mental problems, suicide ratios, polarization levels, expectations of the future, democracy perception index, various other satisfaction rates, crime, etc.

https://twitter.com/i/web/status/1752707003137536199

China offers some services from the public sector for free or cheap, instead of private actors doing it for expensive, making its GDP lower in accounting. But that doesn't mean that their economy is worse, it just means that their citizens have a higher quality of life/happiness.

GDP can be similarly thought of as the sum of all income in an economy or equivalently, the sum of all production in an economy. The public sector not charging explicit fees doesn’t change that because total income hasn’t changed: the government uses taxes to pay for the same services and households can spend that money elsewhere.

this is an aside but US healthcare costs are misunderstood: it’s a small share of the population (~10%) that are responsible for 70% of costs, while most people spend very little on healthcare (

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). It’s a group of chronically ill people and old people (autoimmune, genetic, cancers, etc) who cost a lot because of technological development; ex., a hemophiliac who can now be treated with a bajillion drugs as opposed to prior where there was no treatment (

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)

It's quite easy to understand why China doesn't include rent imputations in its GDP accounting method, and why it relies mostly on the old Soviet-era Material Product System (MPS) method for counting its GDP. Why are the free/nearly free government socialized benefits not accounted for at all, etc? If I were to speculate, I say that China's real economic power/GDP is about 2X of the US, just like its electricity use.

This is wrong lol. China uses imputed rent in GDP calculations (just like everyone else). Fiscal transfers are included in GDP. Public services are included in GDP, either from public salaries (from the income approach), or from public expenditures (the consumption approach).

 

[Serb]

GDP can be similarly thought of as the sum of all income in an economy or equivalently, the sum of all production in an economy.

There is a third method as well, and that is also the most common method that every country uses nowadays, you didn't mention - that is measuring it by expenditure (US & OECD, uses it, China uses it, etc):

This includes HH consumption, investment (spending on capital goods that will be used for future production), government spending (on final goods and services only), and net exports (exports minus imports ofc).

The public sector not charging explicit fees doesn’t change that because total income hasn’t changed: the government uses taxes to pay for the same services and households can spend that money elsewhere.

It can be counted only using one method I mentioned at a time, not multiple times at the same time to make the US 'Frankenstein' economy look good.

We are talking about the third approach, measured by consumption, nearly every country in the world uses that nowadays.

When I stated what I stated, I didn't talk about the method used to count GDP, but the accounting standard.

China never really properly transitioned from its Soviet-era Material Product System (MPS) system of national accounts to the United Nations’ System of National Accounts (SNA) standard.

That's why they are using the same general method as the US, but a different accounting standard by large, making their GDP look smaller.

The public sector not charging explicit fees doesn’t change that because total income hasn’t changed: the government uses taxes to pay for the same services and households can spend that money elsewhere.

Who is talking about the income-based method? We are using the consumption-based method. GDP=C+I+G+(X−M)

C is total HH consumption, I is total investment, G is total government spending, X is total exports, and M is total imports.

When a person in the US pays for education and healthcare 100k, and in China he pays 10k for example, or even nothing, for the same service.

Then the C part of the GDP formula makes the US's GDP larger by 90k. Despite it not being any kind of a positive economic sign.

You can go into transportation (railway ticket, etc), various utilities (telecommunication bills, etc.), and infrastructure, and find the same problem of underscoring HH consumption,

Because this is provided by the government in China (which makes it cheaper/free), and private actors in the US, making it expensive.

And government in China is pricing it to only cover operating costs, interest payments, and depreciation, not to make a profit.

And private actor in the US (everything is privatized in the US) is pricing as to make the most profit possible and do "rent-seeking".

this is an aside but US healthcare costs are misunderstood: it’s a small share of the population (~10%) that are responsible for 70% of costs, while most people spend very little on healthcare (

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). It’s a group of chronically ill people and old people (autoimmune, genetic, cancers, etc) who cost a lot because of technological development; ex., a hemophiliac who can now be treated with a bajillion drugs as opposed to prior where there was no treatment (

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)

It's not only healthcare, my son, it's everything possible under the sun, as I mentioned in my previous passage.

This is wrong lol. China uses imputed rent in GDP calculations (just like everyone else). Fiscal transfers are included in GDP. Public services are included in GDP, either from public salaries (from the income approach), or from public expenditures (the consumption approach).

Not, China doesn't do imputed rent in its calculation like the US & developed countries. If they did, their GDP would automatically be 4% higher just on that alone.

Again, you have ZERO knowledge about the third, THE MOST COMMON, GDP-measuring method in the world, and that is don't it by the consumption.

In that approach, the reduced HH spending (thanks to lower pricing, or even completely free services), has nowhere else "to go", but in the C factor in the formula above.

If not then, then where will it go? It can't go into investments (that's mostly about the business sector), it can't go into net exports, and it can't go into government spending.

Because at that exact point of sale, it is only the consumer who consumes the service, buys railway tickets, uses a cheap, public community canteen if he is elderly, gets cheap medical bills, etc.

Under government spending part of the GDP it's about what the government spends, and here is about what the consumer spends, at the endpoint of the cycle.

This is not about the total government expenditure on final goods and services. It's not about how they purchased some brick or cement, or a rail track to create the service instead (which is what G stands for).

One of the best economists in China predicts that just by not using the SNA like the developed world its actual, real GDP needs to be grossed up by 25-40%.

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And here is one of the most famous economists from the West on Twitter, says another 4% on different imputed rent calculation methods:

https://twitter.com/i/web/status/1674086623867174917

I don't know how much more it would need to be grossed up if we account for all the free/cheap social services provided. But if the Chinese GDP PPP is already 20% higher than the US's right now. And these two factors above, I would say it could really bring it all up to 200%.



If you still don't believe me and want to go more into detail about the exact mechanisms of rent imputations, CNA differences, and other different accounting approaches between China & West, go and read this, but it's highly technical, and I doubt you would understand anything:

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[chgough34]

There is a third method as well, and that is also the most common method that every country uses nowadays, you didn't mention - that is measuring it by expenditure (US & OECD, uses it, China uses it, etc):

This includes HH consumption, investment (spending on capital goods that will be used for future production), government spending (on final goods and services only), and net exports (exports minus imports).

If correctly done, the income, expenditure, and product/value added approach should all be equal, all the large statistical agencies calculate gdp based on all 3 and all have their conceptual uses.

Who is talking about the income-based method? We are using the consumption-based method. GDP=C+I+G+(X−M)

C is total HH consumption, I is total investment, G is total government spending, X is total exports, and M is total imports.

When a student in the US pays for education and healthcare 100k, and in China he pays 10k for example, or even nothing, for the same service.

I’m using the income method to explain why charging more for the same service doesn’t change GDP. Total productive capacity hasn’t changed, if they pay more for education or healthcare, that means they don’t have money to pay for something else. This, applies as well to all public services to where fees are not explicitly charged or priced under what free market clearing price would produce.

It's not only healthcare, my son, it's everything possible under the sun, as I mentioned in my previous passage.

It was an aside; I only mentioned it to criticize why “becoming healthier” wouldn’t substantially reduce healthcare costs. Health promotion won’t reduce costs for the most chronically-ill people, that are responsible for nearly all healthcare spending. Public health departments aren’t going to be able to stop old people from getting cancer, cure hemophiliacs, or stop autoimmune disorders.

Not, China doesn't do imputed rent in its calculation like the US & developed countries. If they did, their GDP would automatically be 4% higher just on that alone.

China doesn’t calculate imputed rents is a vastly different statement than “China uses a different denominator for calculating imputed rents”. The latter, which you now argue, necessarily implies that imputed rent is calculated in GDP.

If not then, then where will it go? It can't go into investments (that's mostly about the business sector), it can't go into net exports, and it can't go into government spending.

Because at that exact point of sale, it is only the consumer who consumes the service, buys railway tickets, uses a cheap, public community canteen if he is elderly, gets cheap medical bills, etc.

The consumer will either spend on something else, or they will save money and that will be absorbed by either business investment or net exports (this is the sectoral balances identity).

Under government spending part of the GDP it's about what the government spends, and here is about what the consumer spends, at the endpoint of the cycle.

The cost incidence is still absorbed, and generally in-kind transfers are recorded on the consumption, not the government account; but regardless, they are added to gdp.

 

[Serb]

If correctly done, the income, expenditure, and product/value added approach should all be equal, all the large statistical agencies calculate gdp based on all 3 and all have their conceptual uses.

Income and production are legacy methods. For a few decades calculating it by expenditure has become the norm.

Nearly every international economic organization, country, and market participant uses exactly that method. So, you're wrong.

I’m using the income method to explain why charging more for the same service doesn’t change GDP. Total productive capacity hasn’t changed, if they pay more for education or healthcare, that means they don’t have money to pay for something else. This, applies as well to all public services to where fees are not explicitly charged or priced under what free market clearing price would produce.

You can't mix between the different accounting methods, you can pick only one, this is basic common sense, I don't understand where you got that idea.

The consumer will either spend on something else, or they will save money and that will be absorbed by either business investment or net exports (this is the sectoral balances identity).

GDP in essence measures all economic activity in a single given calendar year.

You are right that they will spend money on something else, but a lot of that, they won't spend and goes into savings

And savings are not factored in GDP, at least using the method by expenditure.

That savings could eventually be given as loans to businesses, but the materialization of that in terms of affecting GDP, like business investment or net exports won't be felt in that given calendar year in most cases, and we can't know the extent of how much it will materialize.

So, at least in this way, the official Chinese GDP is still lagging behind a few years.

Anyway, even if it lowers my estimate of China's real GDP a little bit,

I still didn't factor in various 'underwater' business activities in China,

That is not present in the US due to them overaccounting literally everything.


.

 

[chgough34]

Income and production are legacy methods. For a few decades calculating it by expenditure has become the norm.

Nearly every international economic organization, country, and market participant uses exactly that method. So, you're wrong.

No. The income and product approaches were conceptually well understood but those time-series have only come recently as economic data has been able to be gathered on a more detailed level and are very commonly used and published -

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,

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You can't mix between the different accounting methods, you can pick only one, this is basic common sense, I don't understand where you got that idea.

no, I’m using it to explain why your reasoning by accounting identity is faulty. You assume all else equal and I’m explaining why all else is not equal.

GDP in essence measures all economic activity in a single given calendar year.

You are right that they will spend money on something else, but a lot of that, they won't spend and goes into savings

And savings are not factored in GDP, at least using the method by expenditure.

That savings could eventually be given as loans to businesses, but the materialization of that in terms of affecting GDP, like business investment or net exports won't be felt in that given calendar year in most cases, and we can't know the extent of how much it will materialize.

savings in the short-run are immaterial to both production and income but the assumption that savings in one area are not transferred to other areas is highly questionable. Further, even assuming they aren’t, overcharges on public services would result in more corporate savings and similarly, be immaterial. Total consumption is the same, it’s just how those consumer and surpluses are distributed that are different and ergo, whether it gets distributed as personal savings, retained corporate savings, or a distribution from a corporate capital structure (I.e., dividends, share buybacks, or interest payments).

 

[Serb]

No. The income and product approaches were conceptually well understood but those time-series have only come recently as economic data has been able to be gathered on a more detailed level and are very commonly used and published

no, I’m using it to explain why your reasoning by accounting identity is faulty. You assume all else equal and I’m explaining why all else is not equal.

So, what can we learn from them? Do they challenge my assumption that the Chinese GDP is massively underestimated? Where to see it?

And in general, what findings did you extract from them that could be useful for a discussion about China's economy in general so you keep bringing them up so much?

Yes, those two approaches are used today, but not for measuring comprehensive economic strength,

But to measure the distribution of various income and production outputs by categories (and the gross value added) of the entire economy.

And still, they are nearly impossible to find. Generally, the GDP reported by various countries, global organizations, financial institutions,

Is only the expenditure-derived GDP, not some kind of statistical average between the 3, so I don't understand how they are relevant.

Even if Chinese GDP is understated only in the expenditure method, and not in the other 2, we wouldn't know that since it is obscure info.

savings in the short-run are immaterial to both production and income but the assumption that savings in one area are not transferred to other areas is highly questionable. Further, even assuming they aren’t, overcharges on public services would result in more corporate savings and similarly, be immaterial. Total consumption is the same, it’s just how those consumer and surpluses are distributed that are different and ergo, whether it gets distributed as personal savings, retained corporate savings, or a distribution from a corporate capital structure (I.e., dividends, share buybacks, or interest payments).

We are not talking about what's immaterial, or what's material, but about the accounting conclusion reached for GDP at the end of the year. If the Chinese lower prices of various public services resulted in more savings left for people to have, that's not accounted for in GDP, but had they spent more on overpriced private services like in the US, it would've ended in the GDP calculation. What's so hard to understand here for you?