I’ve talked on several occasions of the lack of confidence that one could have in the official Chinese statistics, but I also added in that even the “official” statistics had a measure of caution in their comments.

More evidence emerges as to the dire state of the Chinese economy as you search  a bit around.

1° The investment numbers pose some issues

I mentioned in one of my earlier posts that “investment into fixed assets” could be a good leading indicator about a recovering economy if it had been into equipment assets. It seems that much of these “fixed assets” is, in fact, real estate. This French author gives an account of a Chinese article, and I’m giving you some of these views, after double-checking them with other sources.

In fact the volume of empty apartments across the country hit 91 million sq metres at the end of last year, up 32.3 per cent from a year earlier, according to official figures. But those numbers included neither the huge volumes of completed real estate projects whose owners are waiting for market conditions to improve before they put them on the market, nor the estimated 587 million sq m of apartments sold in the past five years but left empty by their owners.

In addition, as already mentioned, overcapacity is present in the industrial sector. Which leads to an economically inefficient situation:

The purpose of exporting is not to create more factories per se, nor is it to “create jobs”. The purpose of production is for the producers, is is to gain the ability to afford to purchase more goods — either capital goods or consumption goods. Producing things at a loss consumes capital and makes the producer poorer.

2° Unemployment is going soon to be a major threat to Chinese stability

There are about 140 million of peasants who are working as manual laborers in China. On these, about 60 million lost their jobs. Official statistics do not take this population into account and as most of them reverse the rural exodus to go back to their villages, they don’t appear anywhere. Young graduates are in the same quandary: on 5.6 million graduates, 4 million did not find a job. As illustrated by this blog:

From a socio-political perspective, the two most sensitive categories of unemployed for the leadership in Beijing probably are migrants and university graduates. Anecdotal evidence suggests that many of the workers who were laid-off in 2008 are second generation migrants who are disinclined to return to farming, even if they have the option to do so. Local governments will be faced with the difficult choice between: forcing unemployed migrants to return to their rural villages under China’s household registration (hukou) system; subsidizing local employment or unemployment benefits from scarce fiscal resources; or accepting open unemployment in their district.

The problem of unemployed university graduates is new in China, but politically and socially not less troublesome than the problem of unemployed migrants. In this respect, China’s labor market is beginning to resemble India’s, where large numbers of university graduates have been unemployed or underemployed for many years. Of China’s 5.6 million university graduates in 2008, 1.7 million are reported to have been unable to find a job. The main blame for this is thought to be a disconnect between some of China’s higher education programs and market needs, but the slowing economy must also have been a factor. The projected number of university graduates for 2009 is 6.1 million.

This leads to a questioning of the social contract between the Chinese population and the Communist party:

If you have got used to having more, whether it’s a car, or a bigger house, or a more expensive school for your child, you have more to lose when times get tough.

That is why it is so important for the government to get the economy back on track.

When it first faltered, when factories started laying off workers, there was a risk that they would start to feel the government was no longer keeping to its side of the deal, so why should they?

3° Internal consumption will not be enough to stimulate a recovery

There is a lot of illusions harbored in the West about the Chinese stimulus bringing about a recovery in the World’s economy. Whereas firstly, the stimulus is essentially helping to stockpile commodities in China, as I already mentioned, the return of 60 million workers in the country also reorganized the Chinese economy in new ways, and has enhanced the savings thirst that is typical of China. The internal consumption which is already reduced tends to get even more reduced as the Chinese farmers are reluctant to return to farming after having experienced the city’s life.

What is worse, it emerges that China’s employment issue  ultimately hinges on resuming exports.

But government measures won’t be able to stem the rising tide alone. BNP’s Meng said that while China’s stimulus package has helped bolster the economy, it hasn’t had a similar effect on employment.

“If China is building a lot of high-speed trains and nuclear generators, this doesn’t create a lot of jobs. The labor intensity of these projects is less spectacular,” Meng said.

In the short term, the key to job creation on a significant scale will ultimately hinge on a rebound of China’s export sector, which accounts for as much as one out of 10 jobs in China, he noted.

This entails, simultaneously that China does not have any means of raising consumption on an internal scale. Most of the expenses were made into assets and equipments, which, in themselves, do not create an internal demand with the poorest population. An observer of the real estate field in China observes that he sees in China the same characteristics as those of the great depression of the 1930′s in the US. In some way, China combines both the worst characteristics of capitalism and of communism in its economic approach. For more reading, this piece is worth looking into it.

4° The lending frenzy of China is giving way to a terrible bubble with huge losses to follow

As mentioned above, the lending frenzy has been essentially invested into speculative assets such as commodity and real estate. The issue being that when these bubbles deflate, the landing will be extremely hard. In addition, a large extent of defaults might give rise to another financial crisis to the extent of the one hitting the US with the added issue of not having a liberal system to clean up the aftermath.

In the front of these sobering considerations, the official statistics (which themselves are often a mess as there can often be several different statistics with different weightings for the same data) are to be taken with much more caution…

And this also translates the fact that structurally, China remains a country with a third-world economy oriented towards export instead of internal demand. But then, you might ask, how to develop a sufficient internal market for 1.3  Bn people? And do we really want that, given the impact on natural resources?

Recent Posts:

• Taxpayers to the Rescue of Afghanistan Banking Crisis?
• Economic Data and Earnings Schedule for September 2 2010
• Christina Romer Makes a Final Recommendation Before Leaving To Teach Keynesian Economics
• Homebuilder Hovnanian (HOV) Reports Dismal Quarter
• Auto Sales Data for August 2010
• Stock Market Rewind – September 1, 2010