The Saturday essay in the WSJ this week is an excellent piece by Andy Browne (full disclosure: my former bureau chief) on China’s two-speed economy, a phenomenon that I’ve been exploring both in our Dragonomics research and on this blog. The reporting nicely illustrates both the extremely troubled and the extremely prosperous parts of China’s economy, and also makes a strong argument that how Xi Jinping handles the lagging regions will be crucial for the country’s prospects. Here’s an excerpt:
For international investors, China’s two-speed economy—one dying, the other accelerating—is utterly confusing, and it has produced wildly contrasting strategies. If China keeps subsidizing wasteful investment to keep industrial cities alive, its financial system will eventually blow up: At 260% of gross domestic product, the country’s overall debt is approaching danger levels. Some Wall Street hedge funds are taking huge speculative bets against the Chinese currency. Global markets are bracing for a “hard landing” by the Chinese economy and years of subpar growth. The financier George Soros says China is already crashing.
At the same time, however, some of the world’s smartest investors are making the opposite wager: They are piling in. Last year, China attracted up to $37 billion in venture capital, much of it for technology hubs along the coast. That is more than the U.S. typically draws in a year and multiples of what Europe usually pulls in. …
Who’s right? Politics will largely determine the outcome. … Two years ago, Mr. Xi announced an ambitious 60-point economic reform program to give markets a “decisive role” in allocating resources. Many expected that he would shutter state loss-makers and open protected state industries like telecommunications and banking to entrepreneurs, even as he attacked the patronage networks that weave through local industry and governments.
But Mr. Xi seems to have gotten cold feet. Instead of closing down state enterprises, he is bulking them up. He seems afraid that allowing market forces to prevail will entrench geographically based wealth disparities and that an aggrieved underclass could erode the Communist Party’s legitimacy. As Mr. Xi has made clear during his three years in office, his first priority is to save the party. The economy can wait. Against this political backdrop, Beijing’s usually decisive economic decision-making process has started to look rudderless.
What is your thought on analyzing the Chinese economy through publicly traded Chinese companies’ financial statements?
I am asking you this is because, base on my understanding, one of the biggest obstacle to understanding the state of the Chinese economy is the lack of impartial data. But I feel that a crucial source of data that can offer us key insights into the Chinese economy have been underutilized by researchers, and they are the publicly available financial reports of Chinese companies.
Individually, these reports may not offer us significant clues to the understanding macroeconomic conditions of the Chinese economy, but in aggregate, they should give us insights into not only how each industry and sectors are performing, but also allows us to take the pulse of the entire Chinese economy.
I have already gather some data on my own, and I can already see that debt has already reached a unsustainable level, Granted my sample size are small at the moment, but the majority of the companies that I have analyzed have been hemorrhaging cash at a very fast rate since 2010 and consequently have become reliant upon borrowing to survive.
I would love to hear your thoughts on this.
My colleagues at Dragonomics actually do use this technique; we can aggregate financial statements from a large number of domestically listed firms. This allows us both to cross-check the macro data and also to get different and more granular insights. So yes I think it’s a useful approach; in most cases we find that the macro data and the aggregated micro data do tell pretty similar stories.