Kaletskating on thin ice

Anatole Kaletsky’s name figures prominently in the website of Evergreen-Gavekal and yet, his comment in ‘Project Syndicate’ diverges quite a bit from their common sense views. He sets up a strawman and dismisses it. He says that China is not collapsing. No one has said that it has collapsed yet. The risk is there. Two of his remarks deserve to be called out:

But why do the skeptics accept the truth of dismal government figures for construction and steel output – down 15% and 4%, respectively, in the year to August – and then dismiss official data showing 10.8% retail-sales growth?

Simple. China government’s statistics in this aspect are backed up by private sector information and what we see in other statistics. But, retail sales headline figures are not backed up by more micro and granular data.

In short, Chinese economic management seems less incompetent than it did a few months ago. Indeed, China can probably avoid the financial meltdown widely feared in the summer. If so, other emerging economies tied to perceptions about China’s economic health should also stabilize.

It is too soon to draw conclusions on this. Mr. Kaletsky is skating on thin ice. The government is prioritising growth over reforms. Credit growth in September exceeded expectations. ‘Capital Economics’ – no China bear – itself concedes that economic growth began to be juiced up when the threat of official growth target being missed began to rise.

May be, another observation of his should be called out too:

Even as the pace of growth slows, China is contributing more to the world economy than ever before, because its GDP today is $10.3 trillion, up from just $2.3 trillion in 2005.

For any reasonable economist, the fact that GDP has gone up by 4.6 times in a decade should raise questions as much as it does generate admiration. Borrowings by China’s non-financial private sector in the same period has gone up by 7.3 times. This probably is an understatement of the overall rise in debt in China. There is government debt and there is financial sector debt.  It is because of this rise in debt that one should be pessimistic about future growth prospects more than what official (including IMF) estimates suggest.


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