The Real Risk of the Chinese Economy

Though I rarely respond to other bloggers, ever so often I read something that causes me so much heartburn, I am forced to respond.  Marginal Revolution posted a link to the blog Synthenomics criticizing people like myself who are shall we say, rather concerned about the Chinese economy.

Lulu Wang accurately addresses the issue many Chinese face with a lack of investment options and choosing to invest in housing but stumbles writing “The real risk is not that the housing won’t be used, but that the crash would have secondary effects.”  Let’s state this clearly: the real risk is that the housing, industrial capacity, or solar generation won’t be used.  Every other risk is political and comes from that risk.

Let’s examine this a bit further.  In the past 5-8 years, and especially the past 3, China has built an enormous amount of stuff that nobody wants, needs, or uses.  Fueled by a lending boom that began in late 2008 and tripled total lending in 2009, Chinese government at all levels has been spending money like a drunken sailor on leave.  What should scare people however, is just how poorly this money has been spent.  To give you a few examples:

  • The Beijing government admits that 50% of apartments sit empty.  A similar number is found in most major cities in China, not to mention the entire cities that sit empty.
  • After major investment in wind power generation, most wind power capacity was incapable of generating power because… was not hooked up to the grid.
  • Housing price to income ratios that would make a California real estate bubble blush.  The average home price to income ratio peaked around 12 in California.  The China Daily (the Communist party mouth piece) speaks regularly of ratios in excess of 25.  One recent article noted that the average price per square foot in Beijing was nearly $300 while monthly per capita GDP was only $435.  That means using the long term global average for the income to housing price ratio, the average Beijinger should be able to buy a 91 square foot apartment.
  • Industrial capacity utilization that is officially at 60%.  (If you believe the official numbers I have a 91 square foot apartment I’d like to sell you)  This is driven by state owned banks and enterprises that over invested in 2009 due to the stimulus fueled lending boom.

To say that “the real risk is not that housing (or any other similar asset) won’t be used is simply non-sense.  This government fueled spending binge comes from the backs of the Chinese.  When Scott Sumner asks “what do you want them to build more of?” and Lulu responds “that Scott can get a haircut for $4 or an ice cream cone for 50 cents shows how low productivity and wages are in China” demonstrates how far removed from reality both are.

Despite protestations to the contrary, the Chinese are purposefully suppressing consumption to pay for their white elephants.  With corporate tax rates of 65% and a total personal rate of about 70%, it should come as no surprise that consumption in China represents such as small fraction of the economy.  Living in China I can attest first hand to the fact that China has easily the highest price level of any country I have visited in the past two years.  An ice cream cone for 50 cents?  Lulu obviously has spent too much time in Michigan and not in China.  Without the willful suppression of the Chinese consumption to pay for political boondoggles in the form of forced public savings, who would pay for trips to Macau?

What Lulu Wang does allude to but misses its importance, is the political economic drivers.  For instance, he writes:  “I want them to start building leaf blowers, so we don’t have so many Chinese people in the low productivity position of sweeping streets.”

Let’s make the political economic driver as crystal clear as possible: the Chinese government has made a very clear and conscious decision to create low productivity jobs in order to prevent civil unrest.  Beijing isn’t concerned about the 2/3 of the population that still live as subsistence farmers in rural areas.  Farmers in rural areas can’t riot in Tiananmen Square.  City dwellers in Shanghai and Beijing that don’t see a new mall being built can cause problems.  As long as people are working, even if it is doing things incredibly inefficiently and building bridges that collapse, at least they aren’t rioting in the streets.  The unemployed riot, while those working and enjoying Party beneficence do not.  The Chinese government has no interest in creating high productivity workers that efficiently build businesses because that removes the political control.  The MIT economist Yasheng Huang has estimated that still around 80% of the Chinese economy remains in state hands.  There is no Chinese economic liberalization story.  It is all a party control story.

Now to the scary part.  The Party is scared.  Every 10 years there is a power hand over.  There will be a power hand over later this year.  Every incoming leader is petrified of being the leader under whom China collapses.  There is typically a political crackdown and economic goodies all around.

However, this year has not been a good year for the party.  Economic data that is now just blatantly made up, at least one coup attempt to begin the year, and a collapsing economy do not make ideal conditions to hand over power.

Outsiders do not realize how tense things are in China right now and bad business is.  In my local mall where police used to stroll by, large battalions of police troops are now regular guests.  Small tanks and rows of paddy wagons line the street under the Starbucks every night.

Beijing has backed themselves into a corner and the downside risk is this: announce the apartment owners that their homes are now worth 50% less.  Then see what happens in Tiananmen Square.


21 thoughts on “The Real Risk of the Chinese Economy

  1. Pingback: Christopher Balding on the real risk in China

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  3. when are you writing the follow up on the gic/th accounting tricks? there are a lot interested people waiting to read it.

  4. Professor Balding,

    Here is one of your central points:

    “Housing price to income ratios that would make a California real estate bubble blush. The average home price to income ratio peaked around 12 in California. The China Daily (the Communist party mouth piece) speaks regularly of ratios in excess of 25. One recent article noted that the average price per square foot in Beijing was nearly $300 while monthly per capita GDP was only $435. That means using the long term global average for the income to housing price ratio, the average Beijing should be able to buy a 91 square foot apartment.”

    I am sorry to say this is a poorly written paragraph with undefined and misleading comparables. Without getting dragged into all the vague points, you made a critical mistake of not verifying numbers. As a result, EVERY SINGLE NUMBER YOU HAD IN THIS PARAGRAPH IS WRONG.

    The most important error is that GDP per capita of Beijing should be $12,456 per year, not $435 per month.
    (Easily verifiable through many sources)

    As a professor at a top university in China, you are expected to hold yourself to a much higher standard than this.

    So, professor, here is my question for you:

    Would you give a pass to a PHD student when he builds his research on incorrect numbers coped from “ONE RECENT ARTICLE”?

    Best regards,


    • Ben, thanks for your post. If you like, feel free to write the China Daily and tell them their GDP figure is wrong. If you want to argue with the GDP data used by the China Daily (Communist Party) then you are free to do so. Their website is You get them to change their data, I will gladly change the number and the link.

      • Professor Balding,

        You are in a highly respected profession where personal integrity and rigorous pursuit of truth are expected. On that note, I have to say I am disappointed. By quickly pointing fingers, you conveniently relinquished your responsibility of seeking the truth.

        China Daily is a serious news paper with occasional official announcements, nothing more. It is by no means a channel for official statistics. Hundreds of articles are being submitted to the paper any given day, many from freelance writers from all walks of life, but only a selected few can be economics professors at a top university in China. You are expected to hold a higher standard.

        So here is a simple question for you:

        Were you aware of the official GDP per capita statistics for Beijing at the time of writing your essay? If you say no, you failed to back your research with sufficient due diligence. If the answer is yes, you failed by making an erroneous case and ignoring data contradicting your thesis.

        You chose to position yourself as a China expert and have successfully become an outspoken opinion leader. Congratulations! Nevertheless, I hope you understand that your choice also placed yourself under public scrutiny.

        You wrote: “Ever so often I read something that causes me so much heartburn, I am forced to respond”. I am sorry to tell you I have the same feeling. Your research style that is based on subjective observations, random pickings of anecdotes and unverified statistics is truly mind boggling. You made numerous errors in your essays. I won’t have the time to exhaust all of them, but I would like to challenge the following few for now:

        *** You wrote: “The average home price to income ratio peaked around 12 in California.”

        That is simply wrong.

        Housing price peaked in California in March 2007. According to US Census Bureau 2007 survey, California medium housing price for the year was $532,300 and medium household income was $59,948. The ratio was around 9.

        You also randomly picked California as a representative of expensive regions. I dare to offer a couple of much better examples, Manhattan at a ratio of 12 in 2009 ($800,000/$66,818), and Vancouver at 18.4 in Feb 2012 ($1,235,242/$67,090). Alternatively, you can also try Moscow, Buenos Aires, and Mumbai. While reliable statistics are not readily available for those cities, if your anecdote based research methodology is applied, those markets probably make Beijing a bargain.

        *** You wrote: “The China Daily (the Communist party mouth piece) speaks regularly of ratios in excess of 25”

        I think you are referring to this on China Daily 2012-04-14: “Practices in developed countries indicate that the median house price usually ranges from three to six times the average household income. The ratio, however, is more than 15:1 and even as high as 20:1 in some of China’s first-tier cities, such as Beijing, Shanghai and Shenzhen.”

        I am not surprised to see you didn’t verify those numbers, but I am surprised you actually misquoted and exaggerated on those already inflated numbers. Yes, I said “inflated”, and I assume you have been in China long enough to know the word “grey income”. There is no point to speculate on the magnitude, but suffice it to say most families in China has some kind of supplementary income which help to understate the income and inflate the ratios.

        *** You wrote: “The Beijing government admits that 50% of apartments sit empty.”

        Since you didn’t tell your reader where you got this number, please allow me to provide the service: 人民日报:北京房屋惊人空置是场虚惊 (2012年06月06日) ( )

        With your status as a China expert, I would be extremely surprised if you claim you had not examined this clarification, at least with the help of Google Translate.

        So, can you please tell me why you chose to emphasize on this number, while knowing it was generated through highly questionable daytime door-knockings and it was only the result of an incomplete survey? If the same methodology is applied, you will probably get the same vacancy rate in Manhattan today.

        In the meantime, did you apply basic common sense before you draw a conclusion? If the so-called 3.8 million vacant homes were true and representing 50% of total housing units in Beijing, the remaining 3.8 million occupied homes would have to accommodate 5.8 persons each on average to satisfy the population of 22 million in the city. What a laughable conclusion! More amazing fact is that this is being confidently quoted by a professor from a top university in China.

        I wish I could stop at here. But another essay of yours “Six Degrees of Separation” also “causes me so much heartburn”. So here you go:

        *** You wrote: “Just to put this in one last bit of perspective. The average price per square foot to buy an apartment in Beijing: $286. Beijing per capita GDP: $5,181. The average price per square foot in Waltham, Massachusetts: $252. The median income of Waltham, Massachusetts: $65, 238.”

        First of all, through your various essays in multiple occasions, you made comparisons of price to income ratios between Beijing and cities in the US. In case you haven’t realized, the standard reference to this ratio is medium housing price to medium Household Income, and the number of members per household in the US is 2.6 on average. It is a serious mistake to compare this standard ratio with a ratio based on per capita GDP in Beijing. Even if you did this unconsciously, your essay misled readers to make incorrect judgments.

        Secondly, you failed to inform your readers that a typical house in Waltham is of a wooden structure and over 2000 square feet in size, and not a good comparable to properties in Beijing. While varied on regions, construction costs for Beijing equivalent concrete high-rises are much higher in the US. You also failed to inform your readers that a square foot of apartment will sell today for more than $800 in Manhattan, $600 in Toronto, and well over $1,500 in London and Moscow.

        *** You wrote: “I went to local grocery stores” and found out “China is very expensive place.”

        You made a witty argument by listing a number of low value and high frequency purchases, which easily echo among people. But you are doing a disservice to your readers by not telling them that those items represent a very small portion of true American living costs. Please allow me to help you out here by adding a small list of other things that can improve your accuracy: a bus ticket, a taxi ride, a hair cut, a text book, a beer at a bar, one month of daycare, a visit to your family doctor, a pair of correct glasses, a call to an dentist specialist, half a hour with a lawyer, monthly water bill, a nigh of baby sitting, and the state taxes and tips on every restaurant bill. Oh don’t forget, the happy savings you got from eggs and milk over 3 months in the US are not enough to invite a plumber to change a screw in your kitchen sink. And you need at least a couple of years of those savings to finance one night of stay at a local hospital. And, by the way, most Chinese have not heard about this thing called property taxes in the US, which can amount to a nose bleeding number of years of savings you squeeze out of all the eggs and milk.

        I am glad you didn’t mention McDonalds. Many people don’t realize that McDonalds is nothing more than a seriously overpriced junk food with an oversized outfit marked with “American Culture” in China. It is a terribly overrated representative of live costs in China.

        Here is my two cents. Instead of randomly picking groceries, may I suggest we ask a typical university student in Shanghai? Given university students tend to have reasonable judgment and a limited budget, I think they are the best representative to assess the true living cost of a normal budget conscious citizen in any given city. I can tell you a student in Shanghai can live through the day by having breakfast (RMB7), lunch (RMB13) and dinner (RMB 15) at a neighborhood restaurant for a total of RMB 35 or $5.6. I don’t think you need anyone to tell you this amount of money is not enough to buy you a very basic meal at a food court in a big city of the US. Did I mention housing costs and prices for text books? I don’t think I need to go further.

        Ok, I have spent way too much time on this. I otherwise would be more than happy to debate with you on many other topics, such as “Industrial capacity utilization that is officially at 60%”. You surely know the economic situation in Argentina, so you understand why I think 60% utilization rate, while a symptom of past capital misallocations, is a blessing in disguise for China’s future. And, investments in wind energy that is not currently hooked to the grid are such a bad thing, so you would rather applaud the US government sending tax payers’ money to buy weapons for anti-government troops in Syria?? So much so I would rather like to stop here.

        I have no particular interest in picking on you, and I actually believe China’s future depends on more and more people like you with a will to fight. I just wanted to remind you there are heartless lying hedge fund managers out there happily exploiting your academic standing and weak analysis in their hunting. Along with the status comes the responsibilities. You need to be more rigorous in your research and more open in your thinking, or you may choose to quiet.

        Best regards,


        • Ben, thanks for your post let me try and briefly respond to your points.

          First, concerning Beijing per capita GDP. Let me be the first to invite you to come to Beijing and proclaim in the middle of Beijing that the China Daily doesn’t know what they are doing, talking about, and has many of its facts and ideas wrong. I will be willing to buy lunch and we can discuss. Concerning the bigger issue,the China Daily is a mouthpiece for the CCP and considered reliable to present the official position on matters of importance to the party. The article clearly states that the Beijing per capita GDP is the number I reported. There was absolutely no intent to mislead anyone. Furthermore, the Wikipedia figure links to an equally semi-reliable Chinese article on Beijing per capita GDP. In short, it appears no more reliable that the China Daily source. According to the Chinese National Bureau of Statistics for the last available year (2010), the paverage wage in Beijing was 65,158. Allowing for 12% growth in 2011 and converting at current exchange rates, that translates to roughly $11,493. To the even bigger picture, even if we use your number that doesn’t fundamentally change the analysis in anyway. Let me explain. If a Beijiner makes $12,000 USD and pays $300/square foot, that means if their home price to income ratio fell within a normal range they could still purchase only 200 square feet. That means that if they buy a modest 800 square foot apartment their home price to income ratio is still 20!! This is why the China Daily talks about how home prices would need to fall by 70% to return them to the long term global average. In short, 1) the China Daily does appear incorrect though it clearly states that Beijing per capita GDP is what I quoted. 2) The Wikipedia article providing Beijing per capita GDP is no more reliable. 3) Even if we accept the new number, this doesn’t in anyway fundamentally alter the conclusion that real estate in Beijing is amazingly over valued.

          Second, I am really not sure what your argument is with my citation of US home values to income. Pretty much everything you cite is pretty much in line with what I cite. I was actually referring to San Francisco which I think peaked in 2007 at like 11.5. Many other urban areas didn’t get quite that high but reached very high levels. What is even more important is that let’s assume that a lower rate applies as you say. This means that a Beijing home price to income ratio is even riskier. Look at what happened to California when it reached 9 (your number) think of what will happen if it is currently 20 in Beijing!!

          “*** You wrote: “The China Daily (the Communist party mouth piece) speaks regularly of ratios in excess of 25”” There are many articles over time that speak of this besides the one you mention. There was one about 18 months ago (if I remember the date correctly) that said 50. Go back and look at more articles. The number is bouncing around but always very VERY high.

          “*** You wrote: “The Beijing government admits that 50% of apartments sit empty.”” As I wrote in the follow up article, for about 6 months to a year, this became a widely practiced exercise. The Beijing government actually admitted that about 50% of apartments had no utility hook up. Similar exercises were replicated by academics at Shenzhen University and others. In the new post, I provided more links about this and I am willing to provide more of similar estimates throughout the country. Remember these are done by Chinese academics and citizens trying to gather data. This isn’t my work.

          “*** You wrote: “Just to put this in one last bit of perspective. The average price per square foot to buy an apartment in Beijing: $286. Beijing per capita GDP: $5,181. The average price per square foot in Waltham, Massachusetts: $252. The median income of Waltham, Massachusetts: $65, 238.”” I’ll be honest that I don’t think the building material (concrete vs. wood) has any real relevancy. We are comparing the market price. If the house is a grass hut and people pay $500 a square foot for it and only make $10, that is clearly unsustainable. Furthermore, the average square footage in homes listed in Waltham, MA is 1,530 sqaure feet not your reported 2,000. I have been unable to find a similar statistics for Beijing. Regardless, unless Beijingers are buying 200 square foot apartments, it is an enormous bubble. I can’t compare Beijing to every city on the planet.

          “*** You wrote: “I went to local grocery stores” and found out “China is very expensive place.”” In fact that is NOT what I wrote. Here is a direct quote from the blog:

          “This rudimentary and short comparison of Chinese and American prices is enlightening. What it tells us very simply is this: if you want to survive on rice and onions, you can do quite well in China. If you want luxuries like meat, eggs, and milk, then China is very expensive place. Lest I be accused of dramatizing this situation, there are literally riots in China over the price of pork.”

          I said very clearly that there are many products like rice, noodles, and onions (though I should include other vegetables) which are quite cheap. These are the staples of the Chinese diet. However, most meats are more expensive. We have already covered real estate and apartments (with similar levels of inflation at most other Chinese cities). Any hope for a “middle class” existence is out of reach as something like cars are at least 50% more expensive than most other places which the China Daily admits. The reason this matters is that the Chinese government can talk about its desire to increase consumption or rebalance, but as extremely price sensitive consumers, consumption will never increase when these goods from meat to cars are so much more expensive. Until then, the Chinese consumer will enjoy cheap rice, noodles, and onions while the rest remains too expensive.

          In short, you may not like the ideas I put up but I have not used any misleading data or analysis. If there are any questions please do not hesitate to ask.

    • Ben,
      “The most important error is that GDP per capita of Beijing should be $12,456 per year”

      Although the GDP per capita is USD 12,456 per year,based on the average price per square foot in Beijing at nearly $300,I suppose a suitable area for a respecatble Bejing resident should be around 1,400 sq ft,a gross price of $420,000.00 or 33.72 years income,hardly a respectable figure..I believe it is higher than Singapore,our beloved top winner of GDP per capita in the world competition.

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  6. Professor,
    I read an interesting article by Professor Shu Jie Yao about the shoddy quality of China’s GDP.
    Shoddy investment props up GDP – Global

    An eight-lane bridge collapsed Friday in Harbin, Heilongjiang Province. The bridge, which had been in operation only nine months, has added a total of 1.9 billion yuan ($298.89 million) to China’s gross domestic product (GDP) tally – and despite its collapse, this figure is likely to stay on the books as an achievement in the country’s economic development. What’s more, if the bridge is rebuilt, an additional 1 billion yuan will probably be added to the GDP figure.

    in 1990,consumption at, 63% of GDP,it decreased to 47% in 2011, during the same time period,US’s consumption rose from 88% of GDP to 90% of its GDP.
    So US spent 10% of its GDP on investment,resulting in a GDP growth of 3.5%,if their investment can be increaased to 30% of its GDP,it would result in an annual growth of 10%,the same as China,

    On the other hand,with 53% of its GDP in investment,China had a annual growth rate of 10%,if all the other conditions ar identical,23% of China’s GDP in investment had been an investment wastage.He went on to discuss in details the shoddy investment,most of which are well known.

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  9. Professor Balding,

    Let me make my purpose perfectly clear.

    I am not interested in debating whether China is heading for a hard landing or if it is expensive to live in China. Everyone is entitled to his opinion.

    I am here to challenge the practice of making misleading statements based careless observations and dubious researches. Spreading false statements unconsciously reflects one’s poor judgement and lack of competence; and promoting misleading statements consciously is malicious and shows a lack of professionalism.

    *** First, we will get the GDP number straight. There is only one official 2011 GDP per capita number for Beijing, and it is not your $435.

    The official 2011 GDP per capita for Beijing was $12,447, released on January 19, 2012 by Beijing Bureau of Statistics and publicly announced in its Annual Economic Review Conference on the same day by the Bureau’s spoken woman, Yu Xiuqin (the deputy director).

    “2012年01月19日, 国民经济运行情况新闻发布会上, 北京市统计局副局长、新闻发言人于秀琴说,北京去年全年实现地区生产总值16000.4亿元,按可比价格计算,比上年增长8.1%。按常住人口计算,北京市人均地区生产总值80394元(按年平均汇率折合12447美元)”

    Instead of admitting the error, you spent 334 words to argue why China Daily is better than Wikipedia, which I really only linked for its readability and was genuinely surprised to see you actually dragged on it. GDP per capita of Beijing is one of those readily available data in China. Through Baidu, Google, Sogou, 360 or a Bloomberg terminal, it wouldn’t take a layman more than 5 minutes to find it, but you are still trying to cover it up after several days.

    Anyone is free to use his personal GDP estimate anyway he likes, but for a serious discussion, purposely avoiding the official figure is not acceptable, especially for a professor in economics.

    *** Secondly, the 50% vacancy rate in Beijing is simply wrong, as it doesn’t pass the bare minimum common sense test and the implied 5.8 persons per home living condition is so ridiculously out of touch with the reality. Wrong is wrong, and the fact other people repeated the same mistake 5 times or the wrong number being quoted by 20 people doesn’t make it any more right.

    Keep saying it was somebody else’s mistake doesn’t help either for a professor. A lying hedge fund manager can be pardoned as long as he makes money. There is no excuse for a professor, as your job is to teach people how to tell lies from facts.

    *** Thirdly, I thank you for your invite for a lunch to show me how expensive it can be to enjoy luxuries in China. I am more than happy to take it should the opportunity arrive. But for now, I have to inform you that I know exactly what kind of restaurants you are going to treat me at, and that my parents, brother, cousins, nephews and nieces eat mostly at different restaurants, where I normally dine with them. By the way, your statement that meat is a luxury in China made me speechless, as you took me back to my sweet kindergarten days (in the 70’s, just in case you wonder). I can’t help but wondering if you are saying, because many Chinese are so troubled by the fact that pork is a buck or two more costly in China and eating a few kilograms per month is inevitable, they opt for more affordable necessities, like Gucci bags and trips to Thailand. By the way, please try not stay away from the facts that a normal budget conscious resident can get a hair cut in Shanghai for $2.5, few people pay for a baby sitting, and a plumber visit costs close to nothing in China…

    Most important, please, let’s all stop piling up examples here. We are really wasting time here. You can make any imaginable conclusion and find more than enough supportive evidences in China. The only real conclusion one can draw is that China is very big, very diversified and with so many choices for different budgets. That is exactly my point – a research based on anecdotes is simply wrong.

    *** Fourthly, it is methodologically wrong to dismiss Chinese official statistics as a fake when they are contracting your thesis while happily quoting them when they are in your favour.

    In addition, I found it repulsive to hear people quickly ridicule Chinese official numbers at the same time of jumping with joy when some individual guesstimates a figure that makes the official data look bad. What do I mean by that? Here is a case in point. On June 27, 2011, the National Audit Office of China published its first auditing result of local government debts. A professor in the US and Moody’s wasted no time in putting out their own estimates to ridicule those official numbers, but I bet few of those celebrating on the findings understood how difficult it was to get the official numbers. The official figures were the result of a review of 1.87 million debt issues, and it was conducted by more than 41 thousands of auditing staff members over a period of 3 months. Those satisfied thinkers obviously forgot to ask if that professor had hired a few thousands of private investigators to carry out his research, or whether the few employees of Moody’s got a special peek into China’s top-secrete filing room because their employer was an American company with such a flawless reputation.

    My point is simple, whether to trust Chinese official statistics is a personal choice, but it is embarrassing to assume a private estimate is automatically better on the ground that it can put Chinese official numbers to shame.

    Best regards,


    • So in sum:
      1. Ok. We can use your statistic that still doesn’t change the point.
      2. Just because “it is it is is” doesn’t make it so.
      3. I am really not sure of your point.
      4. Official statistics are bogus. Wait for my next post to see how obvious it is.

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