China's Economy

I've been trying to make sense of what is happening in China, but it's all rather confusing. Let's see:

- Loan growth is off the charts, with close-to limitless money being handed out to every (state-linked) company that asks for it.

- Car sales are still very strong, far higher than last year

- Domestic air traffic is up sharply (+11 % in first five months)

- Even electricity consumption has now (finally!) started increasing year-on-year

Can this be a sustainable mini-boom?

Intuitively, I'm tempted to say "no way!". There's the export drop that hasn't even started easing. There's the overwhelming temptation of allocating all the easy money in all the wrong ways. There's a collapse in foreign direct investment (and probably a sharp slowdown in local private investment as well).

But China has a habit of surprising. My guess is they will keep firing away for a while, and if they're lucky, they (eventually) get to find reasonable uses for much of the excess investment they are putting in place (not immediately, but China might "grow into it" after a while). If they are not so lucky, they will be saddled with huge amounts of new non-performing loans and near-bankrupt SoEs, but that's at least two years in the future.

But even in the adverse scenario, it won't destroy the Chinese economy. Sure, it will drag down the living standards of consumers, because somebody has to pay for the misallocated investment in the end (what's invested cannot be consumed; and if investment doesn't produce useful stuff in the future, it doesn't help future consumption either). But GDP doesn't measure standard of living. It measures the amount of stuff produced, useful or not, well allocated or not.