In my last piece for Entrepreneur.com I was in Shanghai, writing on the growing pessimism amongst the business community in China. I had interviewed five entrepreneurs asking their opinion on the Chinese economy. In the wake of the devaluation of the Renminbi (RMB), the continuing slide of the Shanghai Composite, and growing skepticism internationally on the health of China's economy it's a good time to revisit 3 of those discussions. It's striking how close these 3 entrepreneurs predictions were to the reality of the "Great Fall of China." It also makes them good people to ask about the future of the world's 2nd largest economy.
Typhoon Renminbi
Mr. Bai, the owner of a plastic factory in China said almost prophetically that a "financial typhoon" was coming. He warned that the Chinese government was printing RMB in order to buy dollars and that eventually the currency would collapse against the dollar. I called Mr. Bai for a follow up interview late last week.
"This is just the beginning" he told me with lament. Mr. Bai believes that the Renminbi will continue to depreciate. He predicts that it will fall to a level of 6.6 to the dollar by the end of 2015, then another 8% next year. "I'm constantly watching not only the stock market and exchange rates, but also our actual provincial factory output, and real commodity prices in our area. This allows me to more accurately assess the economy than those sitting in offices in Beijing or banks in Shanghai."
During our last discussion Mr. Bai revealed that he had a Canadian passport and was ready to leave China if necessary. When pressed on whether or not it's time to make his move to Canada he says that while he is prepared to leave any time, he is not yet ready to go. He believes that there "is still time for his factory to make money based on better pricing because of the devaluation."
While Mr. Bai is not an economist, he may not be far off in his assessment. We'll see how his predictions compare to the experts in this article from the Straits Times, one of whom is forecasting the RMB at 6.95 to the dollar by the end of 2016.
"Monitoring" GDP growth
Mr. Yan, a factory owner living just outside of Shanghai, did not believe the official government figure of 7% GDP growth. He angrily said in the first interview that Chinese GDP shrank by 7%, which I challenged. His basis for this was that his factory's production was down 15% from last year, that over 25% of the factories in his area had shut down, and that a friend working for the government was recently put in charge of "monitoring GDP growth" in their locality. "The Party wants 7% growth; they will get 7% growth" he carped after suggesting that monitoring actually meant manipulating.
I spoke with Mr. Yan on Sunday when he clarified his position. He meant that "factory output is down 7% across China," his area being particularly hard hit. In this article from Barron's it is reported that China had "an 8%-plus year-on-year plunge in exports for July." It appears that Mr. Yan may not have been too far off with his assessment of factory output.
When asked if the devaluation would help his factory he said "that in the short term it would help keep the customers that he still has." However, for the customers that had already left or have plans to leave it is a lost cause. To him "this is a short term fix to a long term problem." The Chinese economy is changing, the government is emphasizing R&D and high end manufacturing. Despite being relatively happy with the devaluation of the RMB, he does not see a return to the glory days of the mid 2000's and is doubtful on low-end manufacturing in the long term. "I've made my money" he declares, "the younger generation will have to figure out what's next."
Man Made Growth?
A third Chinese entrepreneur, Mr. Yu agreed with Mr. Yan on manufacturing numbers and falsification of data, but stuck to his original statement on China's real GDP. In our last discussion he asserted his belief that real GDP was 3% to 4% and that the government should stop setting growth goals.
Beijing's stated goal for 2015 is 7% growth. The "official" numbers out of Beijing show that the Chinese economy has met this number EXACTLY in the first two quarters of the year.
Seem fishy?
It does to Mr. Yu. He knows that while the national government sets the target, it has no reliable way of monitoring the actual statistics. The provincial and local governments submit their GDP numbers to the national government and are rewarded for hitting that target. Basically, local governments are incentivized to hit 7%. In order to do that they put people in charge of "monitoring" GDP growth, which leads to "man made" numbers.
Yu's number of 3-4% may not be far off and many economists agree. Andy Xie, formerly Asia-Pacific Chief Economist for Morgan Stanley, believes that Chinese GDP growth rate hovers around 4% to 5% according to this article from CNN Money.
Mr. Yu believes that China will continue to plod along at 3% to 4% growth and says "that's natural for an economy like ours that has seen such intense modernization and expansion for the last 30 years. The government and the people should be ok with that."
Conclusion
The sooner the Chinese government stops putting GDP growth targets out, and starts getting realistic economic data from the provinces, the better off the Middle Kingdom will be. The same goes for the countries stock market which continues its free fall. Until then, the people to listen to for a true appraisal on the Chinese economy are its unfiltered business owners and entrepreneurs. One thing that the "Great Fall of China" has made clear is that the government, despite all of its power, cannot cover up the reality of a drastically slowing economy. The people best suited to comment on it are the entrepreneurs who have helped lift over 500 million people out of poverty according to the World Bank and see what is actually happening on the ground.