America, china and the manipulation debate

There is no doubt advanced industrialized countries are in a deep economic downturn. Given that consensus expectations from newswire surveys of economists continue to overshoot the actual data, it appears that many still do not fully appreciate the magnitude of the downturn; the fact that policymakers continue to cut growth forecasts implies they, too, have not appreciated the depth of the downturn.

There is hope in many quarters that China, after passing Germany last year as the world’s third-largest economy, will remain relatively insulated. This optimism is based on structural factors — where China is in its industrialization process, the command features of its capitalist economy with Chinese characteristics, and the vast resources it can bring to bear on its economic challenges. Late last year, China announced a 4 trillion yuan (around $585 billion) fiscal stimulus package, and on Jan. 11, Premier Wen Jiabao promised it would be increased.

The prolific historian Niall Ferguson captured this sense when he wrote in September 2008 “By contrast [to the U.S.], China’s planned economy seems unlikely to be significantly affected by the slowdown because net exports are no longer the key driver of China’s growth. The only true constraint on China’s planned economy … is environmental.”

This seems too optimistic by half. The Chinese economy is slowing down considerably. While many economists question the accuracy of official data, even the government’s estimate shows a distinct slowdown in Q4 2008 to a 6.8-percent year-over-year pace — the slowest in seven years — after a 9 percent pace in Q3 2008 and about a 10.3 percent pace in the first half of 2008.

These figures might actually exaggerate economic activity. To estimate Chinese growth, many economists also look at China’s energy consumption. In November, the most recent data available, electricity generation in China was 15 percent below the levels a year earlier. By comparison, in November 2007 it was 15 percent above the prior year — which was 20 percent above 2005 levels.

The press warns that Chinese power producers face a $10-billion loss for last year because of the collapsing demand for electricity. Roughly 80 percent of China’s power production is driven by coal, and with electricity demand evaporating, the power producers are drowning in piles of coal for which they paid top dollar. Some estimates suggest coal-fired power output fell 20 percent between July and November.

Not only does Q4 GDP actually appear weaker than the government’s estimate, it seems likely that weakness will extend into the current quarter. Foreign demand is contracting and there is concern that already-slowing domestic demand will weaken further. Canada’s National Post cited warnings from officials in the Guangdong province that 20 percent of its factories may close in the next three months, costing China 2.7 million jobs on top of the more than 6.5 million jobs lost in 2008.