Waiting for the 19th Party Congress
Special points to highlight in this issue:
• Economic activity continues to slow in China, according to the most recent monthly data, and credit continues to accelerate, pretty much in line with what we expected. We have to be very careful, however, about how we interpret the economic activity data. If local governments and state-owned enterprises in China systematically invest in projects that are not economically justified, to the extent that these projects are not correctly marked to market China’s reported GDP will be overstated by that amount, as will its total wealth.
• If we were able to measure value creation correctly, we would see that growth in the Chinese economy collapsed a few years ago, but growth in economic activity has only dropped by just under half, having been propped up by the acceleration in credit growth and by the failure to write down investments that have created economic activity without having created economic value.
• Meanwhile what matters most to the future of the Chinese economy is the continued centralization of power in economic policy-making and in Beijing’s ability to implement reforms that transfer wealth on a substantial scale from local governments to ordinary Chinese households. Next month’s all-important Party Congress will largely determine the extent to which this is happening, and whether President Xi Jinping and his allies will be able to implement the necessary reforms.
Now read on...
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