July 15, 2015

"It’s a little unclear why the government, having committed itself to slowing the economy in order to embrace reform, needs these moral hazard-inducing GDP targets at all anymore."

Quartz Defying all expectations, China’s GDP grew 7% in the second quarter—at least according to the official charade. by Gwynn Guilford

'Electricity use and assorted proxies of industry suggest that it very probably didn’t grow that fast.

'It is an official charade because China’s GDP has long been recognized as a distorted measure of the country’s economic growth. The value “created” in the country’s economy is inflated by the fact that a good chunk of the stuff bought and built in China isn’t worth the official sticker price.

'This is thanks to the government’s “implicit guarantee” of any investments that are political priorities. This gives investors, both corporate and individual, the confidence that the government will bail out any inconvenient losses. It encourages banks and individual savers alike to lend to wasteful projects, as long as an official imprimatur is looped in somewhere. It lets lenders accept these unprofitable projects at face value as collateral for more loans.

'And thus, debt begets more debt—China’s nearly quadrupled from 2007 to mid-2014, to $28 trillion, McKinsey calculates. Outstanding loans using property as collateral now add up to 22 trillion yuan—about 40% of the total—according to Fitch, the ratings agency. That’s about five times what they were in 2008.'

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