Cement Shoes for Chinese Growth
A Concrete View of Chinese GDP
January 8, 2016
Drowning in a Sea of Cement
I was reading National Geographic this morning while riding my exercise bike, and I was dumbstruck by a couple of statistics about Chinese Cement production. China produced 2.7 billion tons of cement last year, versus 90 million tons for the US – that’s 30x our annual output. Very little of their output was exported – that’s 30x our output for their domestic consumption. More astounding was the fact that China has produced more cement since 2012 than the US has since 1900 – and we have built a lot of stuff between 1900 and today.
I’m thinking that we have turned over our entire infrastructure at least once in that period – meaning that their domestic utilization in 4 years was really twice ours in 115. Wow – that’s a lot of cement!
It is also a tremendous amount of waste – and they count it as if it was a real contribution to GDP; which clearly it is not. At $75 per ton, and assuming that everything that they produced above our level of production was waste – a fair assumption in a declining economy (theirs) versus the one that I see out my window in Nashville, (where construction cranes seem to be procreating), this waste totals $187.5 billion. That’s for one commodity in one year – makes you wonder what else may be going on.
To put that number in perspective, $187.5 billion is 42% of the deficit of the US Federal Government in 2015. Where did all that money come from, and how can it ever generate a return and/or get paid back? And it is counted in their GDP as if it was real value creation.
And we just gave their currency reserve status – wow! Who thought that up?
Where do we hide this load, Boss? Take it to the Spratlys!
The economy in China is an opaque, system dominated by a communist state bureaucracy. Not one single economic or financial statistic means anything that we might recognize as reliable. Investment for the last 20 years has been directed at make-work infrastructure projects – including ghost cities devoid of humans – and has led to vast worldwide inflation in commodity prices. This led to commensurate infrastructure building in extractive industries – which is just now coming unwound.
I put together the statistics below to point out two things. First, China is now a fully indebted nation – with little or no debt capacity relative to the US or the rest of the world based on the ratio of total debt to GDP. I estimate that China now has at least $1 T of fluff in its GDP, based on the production of inconsumable commodities such as steel and cement. Making this adjustment, Chinese debt to GDP weighs in at 311% – up from 125% at the start of the Great Recession in 2008. Second, if China were to shrink its productive capacity of steel and cement to levels commensurate with its GDP, world productive capacity would shrink by at least 50%. Until something of this scale occurs, the world will continue to have a huge mismatch between productive capacity and demand, and disinflation will be the inexorable march of prices.
The gigantic rush to the stock market exits that has greeted this year is attributed to weakness in the Chinese economy. We should not worry – the Chinese economy has been a paper tiger for a very long time.
But fear not – the business cycle does still exist, and people will buy more stuff when it costs less. Lower commodity prices will ultimately drive growth in demand. China may just find that lower prices and slack in their own economy may force a return to the only thing at which they really excel – producing lots of stuff for export.
But one thing still bugs me – what did they do with all that cement? My bet – it is the landfill in their vainglorious military effort in the Spratly Islands.
Man-made islands – the last resting place of surplus Chinese cement