The truth about the Chinese economy, from debt to ghost cities

Written by: Stephen Hsu

Primary Source:  Information Processing

Highly recommended. See also references linked below.

Andy Rothman has interpreted the Chinese economy for people who have serious and practical decisions to make since his early career heading up macroeconomic research at the U.S. Embassy in Beijing. He is now an investment strategist for Matthews Asia, where he continues to focus on the Chinese economy and writes the Sinology column. His analysis often diverges from what’s in the headlines, and the contrast between Andy’s interpretation and the dominant, deeply gloomy media narrative of the last year or more is especially pronounced. In this podcast, Sinica hosts Jeremy and Kaiser ask Andy to explain why he’s still bullish after all this time. Don’t miss our backgrounder for this episode, The truth about the Chinese economy, from debt to ghost cities.

Some interesting claims made in the podcast:

1. 90% of China factory output consumed in China (not for export).

2. Export component of total GDP now relatively minor.

3. Build up in debt mostly in SOE sector, used to fund infrastructure and create jobs in wake of 2008 crisis (Keynesian stimulus).

4. Real estate finance not highly leveraged — 30 to 70 percent cash in most transactions.

5. Ghost cities usually due to public + private partnerships in which private apartment developers complete buildings before public infrastructure (e.g., train or subway line) is in place. This leads to 1-2 year ghost city lag that is eventually closed. Follow up investigation of ghost cities shows that occupancy is eventually realized. (I’ve seen one example like this first hand, east of Shenzhen, where occupancy was indeed waiting on the extension of a train line.)

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Stephen Hsu
Stephen Hsu is vice president for Research and Graduate Studies at Michigan State University. He also serves as scientific adviser to BGI (formerly Beijing Genomics Institute) and as a member of its Cognitive Genomics Lab. Hsu’s primary work has been in applications of quantum field theory, particularly to problems in quantum chromodynamics, dark energy, black holes, entropy bounds, and particle physics beyond the standard model. He has also made contributions to genomics and bioinformatics, the theory of modern finance, and in encryption and information security. Founder of two Silicon Valley companies—SafeWeb, a pioneer in SSL VPN (Secure Sockets Layer Virtual Private Networks) appliances, which was acquired by Symantec in 2003, and Robot Genius Inc., which developed anti-malware technologies—Hsu has given invited research seminars and colloquia at leading research universities and laboratories around the world.
Stephen Hsu

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