5 Things You Need to Know About the IMF and Climate Change [feedly]

5 Things You Need to Know About the IMF and Climate Change
https://blogs.imf.org/2018/06/08/5-things-you-need-to-know-about-the-imf-and-climate-change/

By Ian Parry

June 8, 2018

A polar bear on shrinking ice in the Arctic: climate change means the world is getting hotter (photo: Sven-Erik Arndt/Newscom)

The world is getting hotter, resulting in rising sea levels, more extreme weather like hurricanes, droughts, and floods, as well as other risks to the global climate like the irreversible collapsing of ice sheets. 

Here are five ways the IMF helps countries move forward with their strategies as part of their commitment to the 2015 Paris Agreement on Climate Change.

1. Mitigate emissions. Carbon taxes, or similar charges for the carbon content of coal, petroleum products, and natural gas, are potentially the most effective instruments to reduce carbon dioxide emissions, the major source of heat-trapping gases. These taxes are straightforward to administer, for example, building off existing fuel excises, and can raise significant revenue for government that they might use to cut other burdensome taxes on the economy, or fund growth-enhancing investments.

The IMF provides practical guidance on the design of fiscal policy to mitigate climate change. We are developing spreadsheet tools to help countries gauge the emissions, and broader fiscal and economic impacts of carbon pricing, and the trade-offs across alternative mitigation instruments like taxes on individual fuels, emissions trading, and incentives for energy efficiency.

For example, our annual economic review for China showed that a carbon tax, or just a tax on coal use, would be significantly more effective at reducing carbon and local air pollution emissions than emissions trading systems which do not cover emissions from vehicles and buildings, and would also raise substantial revenue.

And according to our forthcoming working paper, a $70 price per ton on carbon dioxide emissions in 2030, which would increase gasoline prices by about 60 cents per gallon, and more than triple coal prices, would be more than sufficient to meet mitigation pledges in some advanced and emerging market economies like China, India, Indonesia, and South Africa. That price would be nearly sufficient in some other countries like Turkey and the United States, but well short of what Australia, Canada, and come European countries need.

These differences in the ability of the $70 price to meet mitigation pledges reflect both differences in the stringency of commitments, and in the responsiveness of fuels and emissions to pricing. For example, emissions tend to be more responsive to pricing in countries that use a lot of coal, like China, India, and South Africa.

1. Energy subsidy reform. Pricing carbon should be part of a broader strategy to reflect the full range of social costs in energy pricing. This includes deaths from air pollution and other local environmental side effects from fuel use. A spreadsheet tool provides, for all member countries, estimates of the energy prices needed to reflect supply, and all environmental costs, as well as the implicit subsidies from underpricing fossil fuels.

According to IMF estimates, efficient energy pricing would have reduced global carbon emissions in 2013 by over 20 percent, and fossil fuel air pollution deaths by over 50 percent, while raising revenues of 4 percent of GDP.

IMF case studies of numerous countries' reforms distill the ingredients for successful reform. One especially important ingredient is compensation for low-income households, which generally requires only a small fraction of the revenues generated from reform. We discuss energy price reforms as part of our annual review of a country's economy, as well as in our technical assistance work with countries like Saudi Arabia , Jordan, United Arab Emirates, and in our courses and workshops.

Pricing carbon should be part of a broader strategy to reflect the full range of social costs in energy pricing.

1. Build resilience. IMF staff have been assessing strategies for building resilience to climate and natural disaster risks, for example in Nicaragua, Myanmar, Zimbabwe and other especially vulnerable countries.

Climate Change Policy Assessments, so far conducted for Belize, Seychelles and St. Lucia, take stock of countries' mitigation and adaption plans, risk-management strategies, and financing, and point to gaps where they need investment, policy changes, or help to build their capacity to address the effects of climate change.

IMF work is also helping to quantify the economic risks in vulnerable countries. For example, we estimate that the annual cost of natural disasters in low-income countries to be around 2 percent of GDP, or four times the impact on larger economies.

The IMF provides finance to help countries respond to the natural disasters and climate-related events. For example, during the 2015 Ebola crisis in West Africa, we established a trust fund to provide debt relief to poor countries hit by natural disasters. The IMF nearly doubled the amount countries can borrow following a large natural disaster.

1. Greener financial sector. IMF staff analyze the ways in which climate risks impact financial stability. They also help identify best practices for stress tests to a country's financial sector as a whole, which reflect climate risks. Various Financial Sector Assessment Programs , from small island states like Samoa to big economies such as the United States and France, have included stress tests to gauge the effects of natural disasters on insurance companies, banks, and other financial institutions.
2. International action. IMF staff also recommend countries coordinate at the multilateral level for example by establishing a minimum price for carbon, to complement and strengthen the Paris process. IMF staff are also involved in developing proposals for the design of carbon taxes for international transportation fuels.

There are many dimensions to climate change, and we are addressing them across the entire institution in collaboration with the World Bank and other international organizations, in terms of policy analysis and advise and our capacity development work.

You can read more about the IMF and climate change here.

Related Links:
The Unequal Burden of Rising Temperatures: How Can Low-Income Countries Cope?
Adapting to Climate Change—Three Success Stories
Climate Change Will Bring More Frequent Natural Disasters & Weigh on Economic Growth 
Chart of the Week: Electric Takeover in Transportation

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Trump Scorns 'Unfair Trade' at G-7, Plans to Leave Early [feedly]

Trump Scorns 'Unfair Trade' at G-7, Plans to Leave Early
https://www.bloomberg.com/news/articles/2018-06-08/trump-says-unfair-trade-to-dominate-g-7-as-he-heads-to-summit

The Group of Seven is kicking off with more Donald Trump threats on trade, cueing up a whirlwind 24 hours of talks between allies before the U.S. president leaves early.

"Looking forward to straightening out unfair Trade Deals with the G-7 countries. If it doesn't happen, we come out even better!" the president wrote on Twitter, hours before he's due to arrive in Quebec. "I am heading for Canada and the G-7 for talks that will mostly center on the long time unfair trade practiced against the United States."

Donald J. Trump

✔@realDonaldTrump

I am heading for Canada and the G-7 for talks that will mostly center on the long time unfair trade practiced against the United States. From there I go to Singapore and talks with North Korea on Denuclearization. Won't be talking about the Russian Witch Hunt Hoax for a while!

7:22 AM - Jun 8, 2018

• 36.7K
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The tweets confirm Trump will indeed come, after weeks of speculation he may cancel rather than endure widespread criticism from allies over steel and aluminum tariffs. Instead, he looks set to fire back with his America First mantra.

Other leaders, such as France's Emmanuel Macron, have warned they won't sign a joint statement that bows to Trump's wishes. "The American President may not mind being isolated, but neither do we mind signing a 6 country agreement if need be," he tweeted.

The G-7 summit is set up to be the most acrimonious in years, putting pressure on Justin Trudeau as host to bridge a divide between Trump and Europe, with Japan's Shinzo Abe poised to fall somewhere in the middle. Trump will leave the summit early to attend a summit with North Korean leader Kim Jong Un.

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Demographic Change in the Great Lakes Region [feedly]

Demographic Change in the Great Lakes Region
https://www.urban.org/research/publication/demographic-change-great-lakes-region

The Great Lakes states face economic, political and social challenges, and population dynamics will influence their future scope and intensity. This report explores population change in six Great Lakes states: Illinois, Indiana, Michigan, Minnesota, Ohio, and Wisconsin. Our analysis relies on census data from 1990 to 2015 and on population projections to 2040 from the Urban Institute's Mapping America's Futures model. Over the past 25 years, the population of the Great Lakes states has grown, though more slowly than the US as a whole. The population that is of prime working age has also been growing, and the states are becoming more racially and ethnically diverse. But if current migration patterns persist and population aging proceeds as expected, we project that the region's population growth will level off. The prime-working age population will decrease (both as an absolute number and as a share of the total population), and the pace of racial and ethnic diversity will increase slightly.

VISIT WEBSITE

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Chart of the Week: The Rise of Corporate Giants [feedly]

Chart of the Week: The Rise of Corporate Giants
https://blogs.imf.org/2018/06/06/chart-of-the-week-the-rise-of-corporate-giants/

The market power of "superstar" companies in advanced economies is growing (photo: iStock by Getty Images)

The growing economic wealth and power of big companies—from airlines to pharmaceuticals to high-tech companies—has raised concerns about too much concentration and market power in the hands of too few. In particular, in advanced economies, rising corporate market power has been blamed for low investment despite rising corporate profits, declining business dynamism, weak productivity, and a falling share of income paid to workers.

The rise of corporate giants has raised fresh questions about whether this trend might continue and, if so, whether some rethinking of policy is needed to maintain fair and strong competition in the digital age. However, corporate market power is hard to measure and common indicators such as market concentration or profit rates can be misleading.

Our Chart of the Week, based on an upcoming IMF working paper using data for publicly listed firms from 74 countries, shows that the issue is broad and goes beyond Big Tech. Specifically, the chart plots the average markups (the ratio of the price at which firms sell their output to the marginal cost of production of that output, which provides a measure of market power) across all firms for advanced and emerging and developing economies.

The chart unveils two clear facts. First, markups among advanced economies have significantly increased since the 1980s, by 43 percent on average, and this trend has accelerated during the present decade. Second, among emerging market and developing economies, the rise of markups is much more moderate, a 5 percent increase on average since 1990.

More in-depth analysis shows that the increase in markups in advanced economies is mostly driven by "superstar" firms that managed to increase their market power further, while markups in other firms have essentially been flat. Interestingly, this pattern is found in all broad economic sectors, not just in information and communication technology.

Should we be concerned about this rise in corporate market power in advanced economies? The short answer is yes, especially if this trend continues. Our paper finds that, starting from low levels, higher markups are initially associated with increasing investment and innovation, but this relationship becomes negative when market power becomes too strong. Further, the link between markups and investment and innovation is more strongly negative in industries featuring higher degrees of market concentration.

The paper also finds a negative association in firms between labor shares and markups, implying that the labor share of income declines in industries where market power rises. In other words, with higher market power, the share of firms' revenue going to workers decreases, while the share of revenue going to profits increases.

What are the policy implications? These will depend on the factors behind this increase in global market power, which are still being debated. Possible culprits include the rise of intangible assets such as software, network effects (when a product's value to the user increases as the number of users of the product grows), or weaker anti-trust enforcement. More research is needed to discriminate between them.

An upcoming conference, organized by the IMF, the World Bank, and the Organisation for Economic Co-operation and Development, will delve into corporate market power, competition policies, product market (de)regulation, and their macroeconomic effects.

Watch a video on "Digitalization and the New Gilded Age" during a seminar at the 2018 IMF-World Bank Spring Meetings.

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GitHub Is Microsoft's $7.5 Billion Undo Button [feedly]

GitHub Is Microsoft's $7.5 Billion Undo Button
https://www.bloomberg.com/news/articles/2018-06-06/github-is-microsoft-s-7-5-billion-undo-button

Oh, GitHub, we knew ye … pretty well, actually, over the past decade. At least programmers did. To us you've been comically unavoidable, from your "Octocat" mascot to the fake, fully furnished Oval Office at your San Francisco headquarters, complete with a special Octocat-emblazoned rug that proclaimed "United Meritocracy of GitHub." Of course, that rug came up a lot when people debated the concept of meritocracy. And part of the reason they were debating it was the sexual harassment investigation that led one of your co-founders to resign—#MeToo before #MeToo. The company seemed to normalize after that, though we also knew you'd been looking for a new boss for a while. Congrats on your $7.5 billion purchase by Microsoft Corp.!

To civilians, it can be baffling what in God's name GitHub Inc. does or why it's worth so much. The key thing to understand is that git is free software and GitHub makes it easier to use that software. Git keeps track of changes in sets of files. The first version, written by Linux creator Linus Torvalds, was released in 2005.

Git isn't for beginners. You typically use it from a command line, as opposed to with a mouse. Want to start tracking changes? Go into any directory and type "git init," and you're off to the races. From there, git lets you get Borgesian about your files. Everyone can make his own "branch" (copy) off the master tree of code and change whatever the hell he wants without breaking anything—git keeps track of it all. This means everyone can have a copy of every change, and you can make tons of mistakes while coding and always have a giant infinite Undo button if you need it.

It's great, but again, not for beginners. Enter GitHub in 2008. GitHub makes it easier for large, loosely coordinated groups of programmers—in corporations, for instance—to use git. It has a well-designed web interface. If you don't think that's worth $7.5 billion, you've never read the git manual.

GitHub rode the wave of git adoption to become the central repository for decentralized code archives. As a result, 27 million users maintain 80 million projects on it—some private and closed off, some open sourced, many abandoned after a weekend of inspiration. That's a significant portion of the software in the world. Everybody uses GitHub. The likes of Google and Facebook Inc. use it to release code, as does Walmart Inc. Your company probably uses GitHub. It's free to use; you pay for more storage and advanced features.

The truly huge thing GitHub does is called a "pull request." I'm a programmer, and my boss says, "Paul, go update our mailing list component to be GDPR-compliant." I download all the recent changes to our mailing list code, create a new branch called "gdpr," then get to work. A week later I've got my code basically functioning. I upload that branch back to GitHub and click a few buttons to issue my pull request. My team can see the work I've done, in shades of green (additions) and red (deletions). If they like the look of my changes they can approve them, and, if everything goes well, those changes will be merged right into the "master" branch. Built in is that Undo button: The old version, the new version, and my interim version are all right there if I need them. Nothing is erased. If something goes wrong, I can revert to an old version.

GitHub made the social dynamics of software development easier to manage and track

In the pre-git era, you updated your software annually and sent customers floppy disks. But if you're running a big software platform, you might update your servers constantly—many times a day or every 20 minutes. You might have hundreds or thousands of people working on hundreds of code repositories in thousands of code branches—a huge weeping willow of code. You might have open source projects where total strangers show up, make their own changes, then issue a pull request back to you from out of nowhere. Could you use the strangers' code? Sure. Do you have to? Nope. GitHub made the complex social dynamics around software development easier to manage and track.

That's how code happens in 2018. The process used to be the sort of thing people did in slow and ad hoc ways, a few times a year, and only after a lot of infighting over email. Now the same process might happen 10 times a day, and the infighting is right there in the pull requests. Hundreds of people might be working on one code thing or 10 people on 100 code things. GitHub makes that doable. I can't imagine life without it. I'd much rather tell a newbie to get a GitHub account than suggest she read the git manual. If all companies are becoming software companies, GitHub is a primary enabler.

A truly fun aspect of Microsoft's acquisition of GitHub is that it was announced before Apple Inc.'s Worldwide Developers Conference. This is like when Passover overlaps with Easter in New York City. The WWDC, sacred nerd summit of Appledom, is where they announce things like a new "night mode" for the operating system and try to convince programmers that Apple Watch matters. But GitHub is nerd infrastructure. Huge portions of modern culture—Google's TensorFlow machine-learning software, for instance, and even other programming languages, such as Mozilla's Rust—run on code managed there. For Microsoft to trot this out during WWDC is a real thunder-stealer. It's nice to see global-platform capitalism played with a little verve.

GitHub represents a big Undo button for Microsoft, too. For many years, Microsoft officially hated open source software. The company was Steve Ballmerturning bright colors, sweating through his shirt, and screaming like a Visigoth. But after many years of ritual humiliation in the realms of search, mapping, and especially mobile, Microsoft apparently accepted that the 1990s were over. In came Chief Executive Officer Satya Nadella, who not only likes poetry and has a kind of Obama-esque air of imperturbable capability, but who also has the luxury of reclining Smaug-like atop the MSFT cash hoard and buying such things as LinkedIn Corp. Microsoft knows it's burned a lot of villages with its hot, hot breath, which leads to veiled apologies in press releases. "I'm not asking for your trust," wrote Nat Friedman, the new CEO of GitHub who's an open source leader and Microsoft developer, on a GitHub-hosted web page when the deal was announced, "but I'm committed to earning it."

Git is one of those things that, in my experience, people who love computers … just love. In mixed company, it's a terrible subject, but with another nerd over beers you could talk for hours, and I have, about what git did, what it means, where it came from, and how bad it used to be in the days of CVS (not the drugstore) and Subversion (which replaced CVS) and Microsoft Visual SourceSafe (which was a crime against software), and how git represents a way of seeing the world in a new way.

When you drink and talk about git, the conversation tends to drift into strange territories. If only everything worked like this! Why are we still sending files around via email? Why aren't there multiple branching versions of everything? Why do we pretend that there's any canonical version of anything? (Because we have to make money.) Git acknowledges a long-held, shared, and hard-to-express truth, which is that the world is ever-shifting and nothing is ever finished.

It's always been this way. Computers are mercurial, but Microsoft strapped an operating system on top of them—first with DOS, then with Windows—and commoditized that processing power. The web was messy and fluid, and Google made it easy to search. The social graph is vast, so Facebook wrote a special database to make it easy to see your friends. The way you truly win big in software is to take something deeply abstract, weird, and confusing, then put an interface on top that makes it look like the most normal thing in creation.

I had idle fantasies about what the world of technology would look like if, instead of files, we were all sharing repositories and managing our lives in git: book projects, code projects, side projects, article drafts, everything. It's just so damned … safe. I come home, work on something, push the changes back to the master repository, and download it when I get to work. If I needed to collaborate with other people, nothing would need to change. I'd just give them access to my repositories (repos, for short). I imagined myself handing git repos to my kids. "These are yours now. Iteratively add features to them, as I taught you."

For years, I wondered if GitHub would be able to pull that off—take the weirdness of git and normalize it for the masses, help make a post-file world. Ultimately, though, it was a service made by developers to meet the needs of other developers. Can't fault them for that. They took something very weird and made it more usable. Microsoft gets that, and my guess is that GitHub will still be humming along in some form come 2048—this is an industry that can think in decades. Underneath all that commoditization, the weirdness remains.
 
Paul Ford is CEO of Postlight, a digital platform and product shop in New York City. He's on Twitter at @ftrainand on email at paul.ford@postlight.com

BOTTOM LINE - GitHub has dramatically accelerated coding and made itself indispensable to programmers. The company can be an invaluable goodwill-builder for Microsoft—if it doesn't screw it up.

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Summers: Donald Trump’s trade policy violates every rule of strategy [feedly]

Donald Trump's trade policy violates every rule of strategy
http://larrysummers.com/2018/06/05/donald-trumps-trade-policy-violates-every-rule-of-strategy/

Donald Trump has put aggressive trade policy at the centre of his approach to the economy. No other economic subject has received such sustained presidential attention or generated so much controversy.

This is problematic as most economists agree that changes in trade policy are unlikely to have a big effect on growth in employment or over gross domestic product and that liberalising trade is likely to do more for US prosperity than managing trade.

But take as a given the US president's mercantilist premise that the central priority of American economic policy should be achieving more fairness in opening up markets around the world. Even given this dubious judgment about ends, the US is proceeding in a remarkably unstrategic and ineffective way. Indeed it is violating almost every strategic canon.

A first rule of strategy is to have well defined objectives so that success can be judged and your negotiating partners are not confused about what you want. Is the US's primary objective to reduce its trade deficit overall or just with particular countries? Is it to protect employment in politically sensitive sectors such as steel and automobiles?

Is it to stop commercial practices such as joint venture requirements that unfairly penalise American companies doing business in foreign countries? Is it to gain more market access for US companies regardless of how successful they are likely to be, as in the case of increased access for the US auto industry to the Korean market?

From tweet to tweet, and senior official to senior official, it is impossible for anyone to know what this administration's priorities are. When everything is presented as a top priority, as often seems to be the case, nothing can really be a top priority. No one can be confident that making concessions will resolve disputes. After all, when China's current account balance was approaching 10 per cent of GDP, it was a priority for the US to bring it down sharply. Today it is running below 1.5 per cent of GDP and America is more truculent than ever towards China on trade.

A second rule of strategy is to unite your friends and divide your potential adversaries. The US seems to be doing the opposite. Surely, China stands out as a competitor in terms of economic scale, growth, extent of government economic intervention and in areas such as artificial intelligence.

Yet, after alienating its Asian allies by pulling the plug on the Trans-Pacific Partnership, the US enraged all of its G7 allies with the imposition of tariffs on steel and aluminium as well as making further threats that have caused them to doubt the US commitment to the rule of law in global trade.

As with the Obama administration's disastrous initial shunning of the China-led Asian Infrastructure Investment Bank, the result has been to cause most of the rest of the world to take China's side against the US.

Decades of sustained efforts to foster a benign relationship with Mexico are also being squandered. The current US approach to Mexico could hardly be better designed for the objective of electing a leftist radical as president.

A third rule of strategy is to use as leverage threats that are credible in the sense that they do more damage to those you are negotiating with than they do to you. "Stop or I will shoot myself in the foot" is a singularly ineffective threat.

The recently imposed tariffs on steel fall into this category. The US has fewer steelworkers than it has manicurists. The market value of the US steel industry is about 0.1 per cent of the stock market. Yet steel is a key input into industries throughout the economy that employ about 50 times as many people as the steel industry does and compete internationally.

By raising the price of steel the US hurts much more of its economy than it helps. Why does the White House think this counts as leverage against the nations it competes with? Especially when in all likelihood they will retaliate in highly strategic ways, with international legal support, by limiting imports from key US industries.

President Trump's trade policies will raise the prices Americans pay for what they buy. They will reduce the competitiveness of the US economy. They will succeed where our traditional adversaries have failed in uniting much of the rest of the world in opposition to us. They will reduce our legitimacy and power by demonstrating our lack of competence. The sooner they are radically revised the better off the US and the rest of the world will be.

 -- via my feedly newsfeed

The Chinese Economy: Problems and Prospects [feedly]

The Chinese Economy: Problems and Prospects
https://economicfront.wordpress.com/2018/06/05/the-chinese-economy-problems-and-prospects/

The Chinese economy is big. In 2017, it was the world's biggest based on purchasing power parity.  Its output equaled $23.12 trillion, compared with $19.9 trillion for the EU and $19.3 trillion for the US.

China also regained its position as the world's largest exporter in 2017, topping the EU which held the position in 2016.  Chinese exports totaled $2.2 trillion compared with EU exports of $1.9 trillion. The United States was third, exporting $1.6 trillion.

The Chinese economy also recorded an impressive 6.9 percent increase in growth last year, easily beating the government's 2017 target of 6.5 percent and the 6.7 percent rate of growth in 2016.  According to international estimates, China was responsible for approximately 30 percent of global economic growth in 2017.

The Chinese government as well as many international analysts also claim that China has entered a new economic phase, one that is far more domestic-centered and responsive to popular needs, and thus more stable than in the past when the country relied on exports to record even higher rates of growth.

It all sounds good.  However, there are many reasons to question China's growth record as well as the stability of the country's economy and turn towards a new domestic-centered growth strategy.  Glowing reports aside, hard times might well lie ahead for workers in China and the broader Asian region.

Chinese Growth

As the chart below shows, China's rate of growth fell for six straight years, from 2011 to 2016, before registering an increase in 2017. Current predictions are for a further decline, down to 6.5 percent, in 2018.

However, Chinese growth figures still need to be taken with the proverbial "grain of salt."  As Lucy Hornby, Archie Zhang, and Jane Pong discuss in a Financial Times article, Chinese provinces routinely fudge their growth data, which compromises the reliability of national growth figures.  For example:

Inner Mongolia, one of China's most coal-dependent areas, and the major northern port city of Tianjin, have admitted to falsifying data that will probably require their 2016 GDP to be revised down. They join neighboring Liaoning, the first province to admit to a contraction during the four-year correction in commodities markets.

Inner Mongolia admitted this month that its data for "added value of industrial enterprises of a certain scale" were inflated 40 per cent in 2016. According to the Chinese statistical yearbook, secondary industry comprises 47 per cent of its GDP. Assuming its 2015 figures are accurate, the revised 2016 figures mean the region's economy shrank 13 per cent. . . .

Like Inner Mongolia, Liaoning admitted to a contraction in 2016 compared with its official performance in 2015. Liaoning admits it faked data for about five years but has not issued a revised series. . . .

Tianjin, one of the big ports that services northern China, could also see a revision. Its Binhai financial district, which offers tax and foreign exchange incentives to registered businesses, swelled to comprise roughly half of Tianjin's reported GDP last year.

Binhai included in GDP the commercial activity of companies that were only registered there for tax purposes, according to revelations last week. That could result in a 20 per cent drop in reported GDP for Tianjin in 2017, according to FT calculations. Binhai's high debt levels and access to domestic and international financing make its phantom results a concern for broader markets.

Another possible data offender is Shanxi, China's most coal-dependent province. Its official GDP growth held up admirably during the commodities downturn.

Last summer China's anti-corruption watchdog announced unspecified problems with Jilin's data, adding another troubled northeastern province to the list of candidates to watch.

Wang Xiangwei, former editor-in-chief of the South China Morning Post, sums up the situation as follows:

This [falsification of data] has given rise to a popular saying that "data makes an official and an official makes data".  The malpractice is so rampant and blatant that over the years, a long-running joke is that simply adding up the figures from all the provinces and municipalities reveals a sum that overshoots the national GDP – by 6.1 trillion yuan (more than 10 per cent!) in 2013, 4.78 trillion yuan in 2014, and 3.6 trillion yuan in 2016.

This data manipulation certainly suggests that China has regularly failed to meet government growth targets.  Perhaps more importantly, even the overstated published nation growth statistics show that China's rate of growth has steadily fallen.

Debt problems threaten economic stability

There are also reasons to doubt that China can sustain its targeted growth rate of 6.5 percent. A major reason, as the next chart shows, is that China's growth has been underpinned by ever increasing debt.  Said differently, it appears that ever more debt is required to sustain ever lower rates of growth.

As Matthew C Klein, writing in the Financial Times Alphaville Blog, explains:

The rapidity and size of China's debt boom in the past decade has been almost entirely without precedent. The few precedents that do exist — Japan in the 1980s, the US in the 1920s— are not encouraging.

Most coverage has rightly focused on China's corporate sector, particularly the debts that state-owned enterprises owe to the big four state-owned banks. After all, these liabilities constitute the biggest bulk of the total debt outstanding, and also explain most of the total growth in Chinese debt since the mid-2000s.

The explosive nature of China's corporate sector debt growth is well illustrated by comparisons to the relatively stable corporate debt ratios in other major countries, as shown in the following chart.

China's growing debt means it likely that sometime in the not too distant future the Chinese state will be forced to tighten its monetary policy, making it harder for Chinese companies to borrow to finance their existing levels of employment and investment, thus triggering a potentially sharp slowdown in growth.  At the same time, since much of China's corporate debt is owed to government-controlled banks, it is also likely that the Chinese state will be able to limit the economic fallout from expected corporate defaults and avoid a major financial crisis.

But, while corporate debt has drawn the most attention, household debt is also on the rise, and not so easily managed if serious repayment problems develop. According to Klein,

Since the start of 2007, Chinese disposable household income has grown about 12 per cent each year on average, while Chinese household debt has grown about 23 per cent each year on average. The cumulative effect [as illustrated below] is that (nominal) income has slightly more than tripled but debts have grown by nearly a factor of nine. . . .

All this is finally starting to affect the aggregate debt numbers. Household debt in China is still small relative to the total — about 18 per cent as of mid-2017 — but household borrowers are now responsible for about one third of the growth in total nonfinancial debt.

By mid-2017, Chinese households held debt equal to approximately 106 percent of their disposable income, roughly equal to the current American ratio.  What makes Chinese household debt so dangerous is that, as Klein notes, "households cannot service their debts out of GDP. Instead they have to rely on their meagre incomes."  And as we see below, the share of Chinese national output going to households is not only low but has generally been trending downward.  By comparison, disposable income in the US normally runs around 72-76 percent of GDP.

In addition, it has been "finance companies and private loan sharks" that have done most of the consumer lending, not state banks.  This will make it harder for the state to keep repayment problems from having a significant negative effect on domestic economic activity.

Thus, while Chinese officials argue that China's new lower rate of growth represents a switch to a new more stable level of economic activity, the country's debt explosion suggests otherwise.  As Michael Pettis argues in his August 14, 2017 Monthly Report on China:

To argue that the authorities have been successful in stabilizing GDP growth rates and now must address credit growth misses the point entirely. If GDP growth "stabilizes" while credit growth accelerates, GDP growth cannot be said to have stabilized, at least not in any meaningful way. Chinese economic growth can only be said to have stabilized if GDP growth rates remain constant without any increase in the debt burden – i.e. credit grows in line with or slower than nominal GDP – and in my opinion, as I said above, this cannot happen except at growth rates well below half the current reported GDP growth rate, or less than 3 percent.

What new growth model?

For several years Chinese leaders have acknowledged the need for a new growth model that would produce slower but more sustainable rates of growth.  As Chinese Premier Li Keqiang explained in a recent speech to the National People's Congress:

China's economy is now in a pivotal period in the transformation of its growth model, its structural improvement and its shift to new growth drivers.  China's economy is transitioning from a phase of rapid growth to a stage of high-quality development.

In other words, China is said to have abandoned its past export-driven high-speed growth strategy in favor of a slower, more domestic, human-centered growth strategy.  China's current slower growth is in line with this transformation and thus should not be taken as a sign of economic weakness.

However, there are few signs of this transformation, other than a lower rate of growth.  For example, one hallmark of the new growth model is supposed to be the shift from external to domestic, private consumption-based drivers of growth.  The slowdown in the global economy in the post 2008 period certainly makes such a shift necessary. But the data, as shown below, reveals that there has been no significant gain in private consumption's share of GDP.  In fact, it actually declined in 2017.

China's private consumption accounted for 39.1 percent of GDP in Dec 2017, compared with a ratio of 39.4 percent the previous year.  The ratio recorded an all-time high of 71.3 percent in Dec 1962 and a record low of 35.6 percent in Dec 2010. And as we saw above, there has been no significant increase in disposable income's share of GDP. Moreover, the existing consumption, in line with income trends, remains heavily skewed towards the wealthy.

What has remained high, as we see in the next chart, is investment, a pillar of the old growth model.

China's Investment accounted for 44.4 percent of GDP in Dec 2017, compared with a ratio of 44.1 percent in the previous year. The ratio reached an all-time high of 48.0 percent in Dec 2011 and a record low of 15.1 percent in Dec 1962.

This investment continues to emphasize infrastructure, real estate development and enhancing manufacturing capacity.  One example:

A symbol of the investment addiction can be found in "China's Manhattan."

Tianjin's Conch Bay, a 110-hectare district with a cluster of 40 high-rise buildings, was supposed to be the country's new financial capital as outlays surged over the past several years. But in late November there were few signs of life. A number of buildings were still under construction; the streets were empty; and even completed buildings had no occupants.

From 2000 to 2010, investment in Tianjin — the hometown of former Premier Wen Jiabao — swelled by a factor of 10.3.

In fact, despite official pronouncements, China's accelerated growth in 2017 owes much to external sources of demand.  As Reuters describes:

China's economy grew faster than expected in the fourth quarter of 2017, as an export recovery helped the country post its first annual acceleration in growth in seven years, defying concerns that intensifying curbs on industry and credit would hurt expansion. . . .

A synchronized uptick in the global economy over the past year, driven in part by a surge in demand for semiconductors and other technology products, has been a boon to China and much of trade-dependent Asia, with Chinese exports in 2017 growing at their quickest pace in four years.

With fixed asset-investment growth at the weakest pace since 1999, exports helped pick up the slack.

"Real growth of overall exports…more than fully (explained) the pick-up in GDP growth last year," Oxford Economics head of Asia economics Louis Kuijs wrote in a note.

And as we can see from the chart below, China's export gains continue to depend heavily on the US market—a market that is becoming increasingly problematic in the wake of US tariff threats.

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