Smoke and Mirrors: The Distinction Between GDP and Wealth Growth Creates a Misleading Picture of China’s Prosperity

When reading articles discussing China, a lot of people get stuck like a deer in headlights on China's GDP growth as a measure of China’s prosperity. This plays well for Zhongnanhai and for those arguing China’s economy is burgeoning. But it does not tell the full story. GDP growth is by no means the only, or best, way to understand the prosperity of an economy. Just like there are far better measures than GDP for measuring quality of life, a better measure is wealth growth. An economy can be growing in GDP terms, while people can still be suffering economic depravation. GDP growth and wealth growth are far from being the same thing. In this regard, Xi Jinping's statement this weekend that China remains a developing country can be said to hold some truth behind the "Global South" underdog rhetoric.

So let’s explore this a little so we can all consider the two metrics when analysing China's real power.

The distinction between GDP growth and wealth growth is often blurred, leading to significant misunderstandings about a nation’s true economic health. An exclusive focus on GDP growth is the equivalent of smoke and mirrors; without nuanced understanding, the full picture is not visible. China’s meteoric GDP growth has been hailed as a testament to its economic prowess. However, a deeper examination reveals a less rosy picture—one where the creation of genuine wealth lags well behind the impressive GDP figures. This distinction is crucial, not only for understanding China’s economic reality but also for assessing its global economic strategies, such as de-dollarisation and the issuance of ultra-long bonds. Moreover, it has profound implications for China’s trade relations with the EU, particularly in the context of highly topical overcapacity and dumping.

The GDP Growth Mirage

China’s GDP growth has been nothing short of spectacular. Fuelled by massive state-driven investments in infrastructure, real estate, and manufacturing, China has consistently posted high growth rates that have dazzled economists and policymakers worldwide. However, this focus on GDP growth, which can be pumped up falsely by, for example, publics pending, has often overshadowed the more telling and critical metric of wealth growth. The other thing, as you will see, is that GDP growth more reflects short-term economic performance, not mid-long term performance better indicated by understanding wealth growth.

GDP Growth:

• Measures the total value of goods and services produced within a country.
• Reflects the scale of economic activity and short-term economic performance.
• Can be driven by high levels of state investment, even if those investments are inefficient or unsustainable.

Wealth Growth:

• Reflects the accumulation of assets and financial health of households and businesses.
• Indicates long-term economic stability and prosperity.
• Depends on sustainable and productive investments that create value over time.

China’s economic model, heavily reliant on state investments and debt-financed projects, has led to a significant discrepancy between these two measures. While GDP growth has been robust, the creation of real wealth has not kept pace. While the economy looks good for the government, it does not really change much for the average person in the short-term.

GDP vs. Wealth Growth: Different Audiences, Different Realities

GDP Growth: The Politician’s Trophy

For Xi Jinping, GDP growth serves as a compelling indicator of economic success and progress. It is a metric that can be easily communicated to both domestic and international audiences:

• Domestic Audience: High GDP growth figures help the Chinese government showcase rapid economic development, fostering national pride and legitimacy. It serves as a powerful narrative to convince citizens of the government's effectiveness in steering the country towards prosperity.
• International Audience: On the global stage, impressive GDP growth positions China as a formidable economic power, attracting foreign investment and enhancing its geopolitical influence. It allows China to present itself as an engine of global economic growth, and supports its arguments to be a global hegemon.

Wealth Growth: A Hidden Reality

While GDP growth paints a picture of a booming economy, it masks the underlying economic disparities and inefficiencies:

• Economic Inequality: Despite high GDP growth, wealth growth is unevenly distributed, leaving significant portions of the population impoverished. Rural areas and lower-income groups often do not benefit equally from the economic boom.
• Illusory Prosperity: Focusing exclusively on GDP growth can create an illusion of widespread prosperity. However, without corresponding increases in wealth, the quality of life for many Chinese citizens remains stagnant. The disparity between booming cities and struggling rural areas highlights this illusion meaning the lack of wealth growth does not solve the growing “grassroots” economic pressure on Beijing, and widespread discontent.

The Illusion of Prosperity

• Short-Term Gains, Long-Term Issues: The relentless pursuit of GDP growth through debt-financed investments can lead to short-term economic gains but creates long-term problems like overcapacity, financial instability, and environmental degradation.
• Economic Sustainability: Real prosperity is measured by sustainable wealth growth that improves living standards, reduces inequality, and fosters long-term economic stability. Without addressing these issues, the impressive GDP figures risk becoming a fa?ade, concealing the deeper challenges within the economy.

So, while GDP growth serves as a convenient and impressive indicator for Beijing's narrative of success, it is smoke and mirrors if not accompanied by genuine wealth creation and equitable economic development. For true prosperity, China must balance its focus on GDP with strategies that ensure sustainable and inclusive wealth growth. At the moment, it clearly does not.

A Decade of Disparity

Over the past decade, China has experienced remarkable GDP growth, but this has not been matched by a commensurate increase in wealth growth. To illustrate this disparity, let’s examine the trends and numbers.

GDP Growth

Consistent High Growth Rates:

• 2010-2019: China's GDP grew at an average annual rate of around 6.8%.
• 2010: GDP was approximately $6.1 trillion.
• 2019: GDP reached about $14.3 trillion.
• 2020-2023: Despite the pandemic, China’s GDP continued to grow, with rates around 2.3% in 2020, rebounding to 8.1% in 2021, and moderating around 4.8% in 2022.

Wealth Growth

Slower and Uneven Growth:

• Household Wealth: According to Credit Suisse's Global Wealth Report, household wealth in China increased from $16 trillion in 2010 to around $74 trillion in 2019. However, this growth has not been evenly distributed.
• Per Capita Wealth: In 2010, the average wealth per adult was approximately $14,000. By 2019, this figure had increased to about $58,000.
• 2020-2023: The pandemic and economic adjustments have impacted wealth growth, with slower increases and greater disparities.:

Figure 1: China's GDP versus Wealth Growth 2010-2023

Disparity Between GDP and Wealth Growth

Wealth Growth Lagging Behind GDP Growth:

• GDP Growth (2010-2019): Approximately 134% increase.
• Household Wealth Growth (2010-2019): Approximately 362% increase in total wealth, but this figure is skewed by substantial gains among the wealthy elite, with median wealth per adult showing slower growth.
• Wealth Inequality: The Gini coefficient for wealth inequality has remained high, indicating significant disparities. In 2010, the Gini coefficient for China was around 0.55, rising to about 0.60 by 2019.

Growing Disparity:

• Urban vs. Rural Divide: Urban households have seen more significant wealth increases compared to rural households. The average urban household net worth was about $95,000 in 2019, compared to $14,000 for rural households.
• Top 1% Wealth Share: The top 1% of the population held approximately 30% of the country’s wealth in 2010, rising to around 40% by 2019, illustrating the concentration of wealth among the elite.

The disparity between GDP growth and wealth growth in China over the last decade has been significant and appears to be widening. While GDP figures present a picture of robust economic expansion, the uneven distribution of wealth growth reveals underlying challenges. The wealth gains have been disproportionately concentrated among the wealthy, with rural and lower-income populations seeing much smaller increases.

The Impact of Strong GDP Growth but Weak Wealth Growth

This imbalance has far-reaching consequences. The emphasis on GDP growth through massive investments leads to several important structural issues:

1. Overcapacity: Industries like steel, cement, and electric vehicles (EVs) have seen production capacities far exceeding domestic demand. Overcapacity leads to inefficiencies and financial strains on companies burdened with idle assets.
2. Debt Accumulation: High levels of state and corporate debt, driven by relentless investment, pose significant financial risks. Debt-financed growth can lead to financial instability if investments do not generate adequate returns.
3. Income Inequality: Wealth generation has been uneven, leading to significant income disparities. While urban areas and certain sectors have flourished, many rural regions and lower-income households have not experienced a rise in their real prosperity.

De-Dollarisation and Ultra-Long Bonds: Economic Strategies Under Scrutiny

China’s recent economic strategies, such as de-dollarisation and the issuance of ultra-long bonds, are attempts to address some of these structural issues. However, their impact on GDP growth and wealth growth must be carefully examined. The public funds injection the bond sale implies, for example, may be retrograde.

De-Dollarisation:

• Economic Sovereignty: Reducing reliance on the US dollar aims to enhance China’s economic sovereignty and mitigate the risks associated with the dollar’s dominance in global trade and finance. The de-dollarisation is also aimed to reducing vulnerability to external actors weaponising China’s reliance on the dollar.
• Stabilising Effects: By diversifying foreign reserves and international trade settlements away from the dollar, China seeks to reduce economic vulnerabilities and enhance financial stability.

Ultra-Long Bonds:

• Financing Infrastructure: Issuing bonds with maturities of 50 or 100 years provides long-term capital for infrastructure projects, potentially boosting GDP growth in the short to medium term.
• Debt Burden: While these bonds offer immediate financing, they increase long-term debt obligations. If investments financed by these bonds do not yield sustainable returns, they will exacerbate financial instability.

The Real Impact on Economic Strength

To truly understand the impact of these strategies on China’s economic strength, we must look beyond the immediate GDP figures and consider their implications for wealth creation.

1. Economic Resilience: De-Dollarisation: By reducing reliance on the dollar, China can enhance its economic resilience and stability, contributing to long-term wealth growth. However, the transition must be managed carefully to avoid short-term disruptions. Ultra-Long Bonds: The success of these bonds in boosting wealth growth depends on the productivity and sustainability of the investments they finance. Inefficient use of these funds could lead to increased debt without corresponding wealth creation.
2. Trade Relations: Overcapacity and Dumping: China’s overcapacity in industries like EVs leads to dumping practices in foreign markets, including the EU. This can distort market dynamics and harm local industries. EU Trade Measures: To protect their markets, the EU may resort to trade-protective measures such as tariffs and anti-dumping duties. These measures can mitigate the impact of Chinese subsidies and overcapacity but may also lead to trade tensions.

The Prognosis for Dumping and Trade Relations with the EU

The overproduction and subsequent dumping of goods like EVs in the European market are direct consequences of China’s investment-driven growth model. Here’s a closer look at the potential developments and the EU’s likely responses:

Continued Dumping:

• Market Saturation: As China continues to produce more than its domestic market can absorb, the surplus will likely be directed towards export markets, including the EU.
• Competitive Pressures: Chinese products, often sold at lower prices due to subsidies and overcapacity, will continue to exert competitive pressure on European manufacturers.

EU Trade Measures:

• Protective Tariffs: The EU is likely to implement or increase protective tariffs on Chinese imports to shield local industries from unfair competition.
• Anti-Dumping Duties: The EU may impose anti-dumping duties to counteract the low pricing of Chinese goods that are sold below market value or cost of production.

Long-Term Trade Relations:

• Strategic Partnerships: The EU may seek to strengthen trade relations with other countries to diversify its supply chains and reduce dependence on Chinese imports.
• Innovation and Competitiveness: European industries will need to innovate and improve competitiveness to withstand the pressures from Chinese dumping practices.

Towards a More Nuanced Understanding of Economic Health

The distinction between GDP growth and wealth growth is vital for understanding China’s economic health and the implications of its global power strategies and trade security impacts. While impressive GDP growth figures may suggest robust economic performance, the underlying issues of overcapacity, debt accumulation, and uneven wealth distribution tell a more complex story of a more troubled society than many account for. This news is overall not good for Zhongnanhai, which might even reinforce the need for smoke and mirrors to distract the increasingly disenfranchised.

China’s efforts to de-dollarise and finance long-term investments through ultra-long bonds the two tines of the strategic fork - reflect its strategic approach to enhancing economic resilience and stability. However, the effectiveness of these strategies in creating sustainable wealth remains to be seen. The impact on trade relations, particularly with the EU, highlights the interconnectedness of global economies and the need for careful management of economic policies to ensure balanced and equitable growth.

For policymakers, economists, and global observers, a nuanced understanding of these dynamics is essential. By looking beyond GDP figures and focusing on the quality and sustainability of economic growth, we can gain a clearer picture of China’s true economic strength and its implications for the global economy as well as understanding better the integrity of the platform on which China’s military ambitions are built. At present, China’s wealth growth is a far more important measure for the mid-long-term performance of China’s economy. And its military intentions. Policy decisions on China should more take account of that than the balder GDP growth.

References

GDP Growth Rates

·??????? World Bank. (n.d.). GDP (current US$) - China. Retrieved from https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=CN

·??????? International Monetary Fund (IMF). (n.d.). World Economic Outlook. Retrieved from https://www.imf.org/en/Publications/WEO

·??????? National Bureau of Statistics of China. (n.d.). Retrieved from https://www.stats.gov.cn/english/

Wealth Growth

·??????? Credit Suisse Research Institute. (2011). Global Wealth Report 2011. Credit Suisse AG. Retrieved from https://www.credit-suisse.com/about-us/en/reports-research/global-wealth-report.html

·??????? Credit Suisse Research Institute. (2019). Global Wealth Report 2019. Credit Suisse AG. Retrieved from https://www.credit-suisse.com/about-us/en/reports-research/global-wealth-report.html

·??????? Credit Suisse Research Institute. (2020). Global Wealth Report 2020. Credit Suisse AG. Retrieved from https://www.credit-suisse.com/about-us/en/reports-research/global-wealth-report.html