44.2 China Announces ‘No Sharp Turns’ for Bad Economy
China’s economy reported positive numbers, yet they are anything but positive. Despite being the only large economy to grow in 2020, and in spite of analysts forecasting further acceleration in 2021, the “No Sharp Turns” policy implies concern of internal fragility.

[Emil’s Summary] Ad Astra is Latin for “to the stars”, which is where a consensus of economists believes the Chinese economy is heading.  After being the only large economy to record any growth in GDP for 2020, economists are forecasting 8% more for this year.  Indeed Beijing’s “skillful” management of the Covids has convinced two economic research centers – one in Japan, the other in Britain – to forecast that China’s economy will become the world’s largest by 2028.

There are three problems, including the surreal acceleration in debt and a shrinking working-age population, but fundamentally, that GDP in China is a political input not an economic output. The Party picks a growth rate in December and any shortfall between economic activity is filled in by uneconomic activity by year end.  With nothing written off, GDP is whatever Beijing wants it to be.

The Chinese growth miracle is neither Chinese, nor a miracle. Instead it is a growth model employed by dozens of countries throughout the past century.  The initial growth is so impressive that it’s seductive to extrapolate the model’s benefits and fail to account for the costs, which come at the end in the form of a rapid write-down, as was the case with the United States after the 1920s, or prolonged stagnation, as was the Brazilian experience after the 1970s.  The Soviet Union followed this policy and grew its economy to 20% of world GDP in 1966 prompting famed economist Paul Samuelson to predict that it would surpass the USA as early as 1984.  Noted academic Ezra Vogel’s best-selling 1978 book “Japan as Number One” similarly failed to anticipate the coming bill.

The Party may very well achieve its vainglorious goals.  But at what cost?  If past experience is any guide expect Ad Terra, not Ad Astra.  But that is for the second half of Episode 44, first we discuss the similarities between the 19th and 20th centuries’ Long and Great Depressions to present day.

———WHO———

Twitter: https://twitter.com/JeffSnider_AIP
Twitter: https://twitter.com/EmilKalinowski
Art: https://davidparkins.com/

Jeff Snider, Head of Global Investment Research for Alhambra Investments with Emil Kalinowski, black tar heroin high. Ad Astra artwork by stoic Brad Pitt of the Pen, David Parkins. Podcast intro/outro is “Wondrous Things” by Mhern at Epidemic Sound.

———WHERE———

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———WHEN———

00:05 China was one of the few economies in the world to expand GDP in 2020.
02:56 How did retail sales do in China?
08:04 Chinese consumption as a percent of the economy is UNBELIEVABLY low – a sign of disorder
10:43 What does the “No Sharp Turns” policy mean for China? Does it imply economic lift off?
13:20 China’s humongous trade surplus is not a sign of strength, it shows internal distortion
15:45 Where are the trade surplus dollars going? We don’t see them at the PBOC or Big 4 banks
16:47 Is a rising Chinese currency good for the country with respect to its debt burden?
19:09 Question the narrative that 2021 is a reflationary, favorable, stimulus, happy rally.

———WHAT———

No Sharp Turns From China’s Potential: https://bit.ly/2MhxsEf
Alhambra Investments Blog: https://bit.ly/2VIC2wW
RealClear Markets Essays: https://bit.ly/38tL5a7