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The Chinese economy is huge, and as a nation it is undervalued, but there is no way for these stocks to actually provide coverage to that portion of the Chinese

by hodwik 11y ago

The Chinese economy is huge, and as a nation it is undervalued, but there is no way for these stocks to actually provide coverage to that portion of the Chinese economy. Too much of that money is off the books, too many of its employees are unreported. Most estimates put it between 10 and 30% of GDP. I think even that is too low, count me with Shaun Rein of China Market Research Group -- "The official economic growth numbers are not too high at all. They’re too low. Why? Because China’s underground economy is far bigger than the 10% to 20% of the total economy that most economists estimate when they do their calculations. Politically the government can’t admit that. A decade ago the U.S. Treasury estimated that 50% of Russia’s economy stayed underground, evading onerous taxes. China’s underground economy as a portion of the overall economy is at least as large as Russia’s."

roymurdock 11y ago
Does he ever qualify this analysis with any hard numbers? I remember reading a study once where researchers looked at electricity usage in Argentina to see what the theoretical output of the country should be vs. the actual output, and used this to approximate the size of the black market.
- hodwik 11y ago
  Credit Suisse had some hard data to put the number at 30%. I can't find the actual study, but here's an article on it -- http://www.bloomberg.com/news/articles/2010-08-12/china-s-wealthy-have-as-much-as-1-1-trillion-in-hidden-income-study-says http://www.bloomberg.com/news/articles/2010-08-12/china-s-we... However, as Rein points out, Credit Suisse and almost all other studies of the Chinese Underground Economy, are only capturing data about Urban hidden capital. It is a commonly understood fact in China, if not quantifiable, that most rural families keep their money in cash, and are very quiet about the quantity of said money.
partiallypro 11y ago
Even if China's GDP is understated, its growth is slowing; many economist agree it is slowing more than the Chinese government is letting us see...The Chinese central banking authority is essentially doing quantitative easing, or is on the precipice of it...that is not signs of a healthy economy my friend. China currently greatly resembles Japan in the early 90s imo. Besides, in the end, even assuming you are completely correct, their stock market it completely decoupled from their economic situation. Even if their economy was growing 10%+, the valuation (F P/E & P/E) is extremely exaggerated.
- Mikeb85 11y ago
  Of course their growth is slowing. Law of big numbers and all that. Even their 'slowing growth' has their economy growing at 7% YoY.
fweespeech 11y ago
> The Chinese economy is huge, and as a nation it is undervalued, but there is no way for these stocks to actually provide coverage to that portion of the Chinese economy. If the growth is outside official channels and unable to be reported on a scale of 50%, "bringing it into the light" would likely cause a major recession/depression all in of itself. It functions because its unregulated, untaxed and its margins are improved by hiding. Once you add those additional expenses, alot of that business will crash.
- hodwik 11y ago
  That is, if the Chinese government was short-sighted enough to tax it at their current rates. I can't imagine that they don't see the benefit to the laissez-faire economy. They just can't admit that there's a benefit, it goes against the party line. If they didn't see the benefit I'd have to believe they'd be doing more to capture those assets.
  - fweespeech 11y ago
    > That is, if the Chinese government was short-sighted enough to tax it at their current rates. http://www.heritage.org/index/explore?view=by-variables http://www.heritage.org/index/explore?view=by-variables China's tax burden as a % of GDP is lower than the US. United States 24.3% of GDP China 19.4% of GDP Businesses that can't function in that environment aren't sustainable at any reasonable tax level.
    - elipsey 11y ago
      I must confess that when I saw a citation to the Heritage Foundation, I felt obliged to verify this through other sources; it seems about right. Also, it's an interesting exercise to view https://en.wikipedia.org/wiki/List_of_countries_by_tax_revenue_as_percentage_of_GDP https://en.wikipedia.org/wiki/List_of_countries_by_tax_reven... which has a table is sortable by rate. You can see, for example, which states get revenue from oil, and have very low taxes but perhaps little incentive to diversify, and other interesting stuff. Looking at the extremes really makes me wonder how some societies operate.
wisty 11y ago
Is the proportion of unregulated GDP growing or shrinking though?

by hodwik 11y ago

roymurdock 11y ago

Does he ever qualify this analysis with any hard numbers? I remember reading a study once where researchers looked at electricity usage in Argentina to see what the theoretical output of the country should be vs. the actual output, and used this to approximate the size of the black market.

hodwik 11y ago
Credit Suisse had some hard data to put the number at 30%. I can't find the actual study, but here's an article on it -- http://www.bloomberg.com/news/articles/2010-08-12/china-s-wealthy-have-as-much-as-1-1-trillion-in-hidden-income-study-says http://www.bloomberg.com/news/articles/2010-08-12/china-s-we... However, as Rein points out, Credit Suisse and almost all other studies of the Chinese Underground Economy, are only capturing data about Urban hidden capital. It is a commonly understood fact in China, if not quantifiable, that most rural families keep their money in cash, and are very quiet about the quantity of said money.

partiallypro 11y ago

Even if China's GDP is understated, its growth is slowing; many economist agree it is slowing more than the Chinese government is letting us see...The Chinese central banking authority is essentially doing quantitative easing, or is on the precipice of it...that is not signs of a healthy economy my friend. China currently greatly resembles Japan in the early 90s imo. Besides, in the end, even assuming you are completely correct, their stock market it completely decoupled from their economic situation. Even if their economy was growing 10%+, the valuation (F P/E & P/E) is extremely exaggerated.

Mikeb85 11y ago
Of course their growth is slowing. Law of big numbers and all that. Even their 'slowing growth' has their economy growing at 7% YoY.

fweespeech 11y ago

> The Chinese economy is huge, and as a nation it is undervalued, but there is no way for these stocks to actually provide coverage to that portion of the Chinese economy. If the growth is outside official channels and unable to be reported on a scale of 50%, "bringing it into the light" would likely cause a major recession/depression all in of itself. It functions because its unregulated, untaxed and its margins are improved by hiding. Once you add those additional expenses, alot of that business will crash.

hodwik 11y ago
That is, if the Chinese government was short-sighted enough to tax it at their current rates. I can't imagine that they don't see the benefit to the laissez-faire economy. They just can't admit that there's a benefit, it goes against the party line. If they didn't see the benefit I'd have to believe they'd be doing more to capture those assets.
- fweespeech 11y ago
  > That is, if the Chinese government was short-sighted enough to tax it at their current rates. http://www.heritage.org/index/explore?view=by-variables http://www.heritage.org/index/explore?view=by-variables China's tax burden as a % of GDP is lower than the US. United States 24.3% of GDP China 19.4% of GDP Businesses that can't function in that environment aren't sustainable at any reasonable tax level.
  - elipsey 11y ago
    I must confess that when I saw a citation to the Heritage Foundation, I felt obliged to verify this through other sources; it seems about right. Also, it's an interesting exercise to view https://en.wikipedia.org/wiki/List_of_countries_by_tax_revenue_as_percentage_of_GDP https://en.wikipedia.org/wiki/List_of_countries_by_tax_reven... which has a table is sortable by rate. You can see, for example, which states get revenue from oil, and have very low taxes but perhaps little incentive to diversify, and other interesting stuff. Looking at the extremes really makes me wonder how some societies operate.

wisty 11y ago

Is the proportion of unregulated GDP growing or shrinking though?