JACOB GOLDSTEIN, HOST:
Here are a few headlines we grabbed yesterday just as we were putting the show together.
DAVID KESTENBAUM, HOST:
"Will China's Market Volatility Impact Europe?" That's from Bloomberg.
GOLDSTEIN: And from Reuters, "Wall Street Opens Higher On Hopes Of Chinese Stimulus."
KESTENBAUM: Even Wired is getting in on it. Here's the Wired one. "As China's Markets Waver, Silicon Valley Smells Opportunity."
GOLDSTEIN: It wasn't just yesterday. It's every single day. You know, first, China's stock market crashed this summer. Then, a few weeks ago, the U.S. stock market started to fall. And suddenly, everywhere you turned, everybody was just saying, China, China, China.
KESTENBAUM: So today on the show, China.
(SOUNDBITE OF ZOUMA SONG, "CATASTROPHE")
GOLDSTEIN: Hello, and welcome to PLANET MONEY. I'm Jacob Goldstein.
KESTENBAUM: And I'm David Kestenbaum.
GOLDSTEIN: What is going on in China? Is the second-largest economy in the world about to come crashing down?
(SOUNDBITE OF SONG, "CATASTROPHE")
YUMI ZOUMA: (Singing) Show me all your fears as we wait for this to clear, but no one seems to notice, though.
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GOLDSTEIN: We're going to start with China's stock market. It's the thing we've been hearing the most about in the news. And China's stock market, it is not doing well.
KESTENBAUM: We were just looking at a chart. It is very dramatic.
FRASER HOWIE: Think about a steep mountain path going up. And then, you see a very sharp fall, and you basically are back at where you started within two months.
KESTENBAUM: This is Fraser Howie, a stockbroker and analyst in Singapore. He's written a few books about China. We asked him, should we worry about this? And Fraser said, actually, no. Just because the stock market is crashing does not mean the economy is crashing.
HOWIE: For all the drama and all - movements of the past two months, three months, six months, year or whatever, it's actually a very basic story. What you had was a bubble and then a bubble bursting.
GOLDSTEIN: Of course, sometimes, a bubble bursting can crash an economy. Just think of the housing bubble in the U.S.
KESTENBAUM: Yeah, sometimes, it really means something, something that's reflecting what's going on in the world.
GOLDSTEIN: Yeah, but the bubble in China, the stock bubble, Fraser says, is not like that. It's just confined to the stock market. And as stock market bubbles go, it's not even that big.
KESTENBAUM: I was just looking up the dot-com bust here in the United States.
KESTENBAUM: And the NASDAQ dropped by something like 80 percent. So that's actually worse than what's happening in China.
HOWIE: Oh, sure, sure, oh, without question, oh, no. This is not the mother of all bubbles by any means.
KESTENBAUM: In China, he says, the stock market does not actually tell you that much about the economy. It's kind of a new thing in China to even be able to buy and sell stocks. And he says because of that, you should really think about the stock market there as a casino, as people just betting. And it's a casino that is not connected to the rest of the economy.
GOLDSTEIN: All stock markets are sort of like a casino, but that Chinese market is even more that way. He says it's just - sometimes, it goes up. Sometimes, it goes down.
KESTENBAUM: So we thought, OK, let's ignore the stock market as a whole. Let's drill down a layer and look at an actual company, see how it's doing.
GOLDSTEIN: To do this, we went to visit Ted Wang. He has an office just a few blocks from us here in midtown Manhattan. He works at a hedge fund called Puissance Capital.
Hi, I'm Jacob.
KESTENBAUM: I'm David.
TED WANG: Jake, Dave, how are you?
KESTENBAUM: Hi, nice to meet you.
GOLDSTEIN: Ted had a Bloomberg terminal on his desk, a computer, basically, with a bunch of screens full of red numbers.
KESTENBAUM: Can we pull up the information on a Chinese stock?
WANG: This is mid-cap liquor company.
GOLDSTEIN: Mid-cap liquor company, sure. Tell me about this company.
KESTENBAUM: What's the name?
WANG: OK, Hebei Lao Bei Gan. Lao Bei Gan is the brand, OK.
GOLDSTEIN: Liquor company.
WANG: It's a liquor company.
KESTENBAUM: All right, so how much information can we get on a company like this?
WANG: You can get pretty good. You look at, you know, it's - here's on Bloomberg. You can look at their balance sheet. You can look at their cash flow. So look at the inventory levels.
KESTENBAUM: I sort of thought there might not be a lot of information about these Chinese companies, but it's just like looking at a company on any other stock exchange. All the numbers are there. And he says this one is doing fine, selling liquor, doing its thing. And if you look at other companies on the Chinese stock exchange, that's what you see. Some are slowing down. Some are doing great. A lot are just chugging along like anywhere else.
WANG: People shouldn't be freaked out by what's happening in China in the stock market over there. The impact is going to be limited.
KESTENBAUM: Jacob, all this makes me not worry so much. I don't have to be concerned about the overall stock market. And if I look at the individual companies in China, they seem to be doing OK. I'm going to check that off my list, not going to worry about it.
GOLDSTEIN: OK, next up on the list of potential things to worry about in China, you can see it in that liquor company that Ted Wang pulled up. You can see it right in the description of what the company does. It says, produces white spirits. That is the straightforward part, right? White spirits, that's clear liquor. But then, it says, and breeds and raises pigs as well as manufactures feeds.
KESTENBAUM: What are they doing raising pigs as well as feed for animals?
WANG: It used to be a government entity. They employ people. They can't really, you know, fire people.
KESTENBAUM: The government. When you ask is China's economy crashing, sure you can ignore the stock market, but you cannot ignore the government. This liquor company is actually still partly owned by the government, and the government owns huge swaths of the economy. We asked Ted, can you give us a list of some of the things that the government owns? And he just started naming giant industries.
WANG: Oil companies, airlines, banks, brokerage houses, railroads, plane manufacturers, train manufacturers, you name it.
KESTENBAUM: China's economy is this odd hybrid. Back in, like, the old communist days, the government controlled everything, I think down to, like, how many pairs of shoes were made. And that worked terribly. So over the last 30 years, the government has been sort of letting go of some parts of the economy. And what they have now, some people call it state capitalism. It's sort of a market economy, but behind everything, there is the government trying to guide things.
GOLDSTEIN: This created this really interesting tension - right? - because the nature of a market economy is...
KESTENBAUM: You need to let go.
GOLDSTEIN: You need to let go, right? It's sort of bottom-up. Nobody has central control, but China still has this very powerful central government that wants control - that has a lot of control.
KESTENBAUM: For all that, the government's record is pretty good. For, like, the last 30 years, they've had some incredible, like, almost beyond what you expect was possible in the textbooks, kind of growth, like, 10 percent a year for decade after decade.
GOLDSTEIN: Year after year after year. So they have this very good record. And then this summer, people kind of start to doubt them - right? - because as the stock market crashed, Chinese officials started doing things that made people start to worry about the government's ability to steer the economy in a good way.
KESTENBAUM: It was almost like someone in the government had said, why is the stock market going down? It shouldn't go down; it should go up. Someone make it go up.
GOLDSTEIN: So they started doing all these things. First, the government basically started spending billions of dollars to buy stocks because buying is what makes things go up, right?
KESTENBAUM: Then it made this rule that banned major shareholders from selling stock. Don't sell; that makes the price go down.
GOLDSTEIN: And by the end of August, the government was rounding up people who might have said things that made the market go down. One financial reporter actually had to go on state-run TV and apologize. He said, basically, sorry, that article I wrote, it was sensational, irresponsible.
CHRISTOPHER BALDING: I don't think anyone really believed it.
KESTENBAUM: This is Christopher Balding. He teaches economics in China at Peking University.
Did you see the reporter when he went on TV to say, I'm sorry; what I did was wrong?
BALDING: Yeah, I mean - he basically looked contrite because he knew if he didn't, he would spend a long, long time in jail, which he's probably still going to spend a not insignificant amount of time in prison.
KESTENBAUM: None of the government's efforts worked, by the way. The buying of stocks, the ban on selling, the rounding up of people - the market is still way, way down from its peak.
GOLDSTEIN: All right. Quick recap, China's stock market, nothing to worry about - the government reaction to China's stock market, that is much more worrying. It suggests maybe the government is not so good at running China's economy.
KESTENBAUM: There is, of course, a way to know an answer to this question we've been asking. Is the economy crashing? Is it slowing down? You can answer that question with a single number. It is a number that every country calculates, GDP, the gross domestic product, a country's total economic output. One catch in China's case, it comes from the the government that people are wondering if they trust.
GOLDSTEIN: Here's Christopher Balding again at Peking University.
KESTENBAUM: According to the Chinese government, what is the official GDP?
BALDING: The official GDP according to the National Bureau of Statistics, China, is 7 percent.
KESTENBAUM: What you think the number really is?
BALDING: I think in reality it's probably much lower, probably in the 1 to 2 percent range in all likelihood.
KESTENBAUM: 1 to 2 percent?
KESTENBAUM: Just to put that number in perspective, China's economy, remember, has been growing for close to 10 percent a year for something like three decades, so 7 percent, the official number, that would still be very impressive. 1 to 2 percent, though, for China - that is slow. That is something China has not experienced in probably a generation.
GOLDSTEIN: Not everybody thinks it's as bad as Christopher Balding does. In fact, there is a lot of disagreement about how fast China's economy is really growing. But as far as we can tell, basically nobody believes the official government GDP figures. In fact, not even people in China's government believe the government GDP figures.
KESTENBAUM: Mark Williams told us about this. He's an economist who tracks China at a place called Capital Economics.
MARK WILLIAMS: One of the cables of the WikiLeaks release included a comment from the current prime minister of China, Li Keqiang, that some - he said the GDP data were manmade, and he doesn't trust them.
KESTENBAUM: Did you catch that? Manmade - of course they're manmade.
GOLDSTEIN: Well, right, there is that. But there's actually...
KESTENBAUM: He means humans; he means subject to human...
GOLDSTEIN: He means man made-up. And there's a back story to this. Local government officials in China are evaluated partly on GDP growth in their provinces. So they have every incentive to boost the numbers to make GDP look better than it really is.
KESTENBAUM: You can imagine someone in the central government saying, let's give that guy a promotion; his province is doing great. Look at his numbers.
GOLDSTEIN: And what this means is it is not like China's government has some secret separate set of books where they can be like, OK, we know the real GDP number; and then we'll just tell everybody else something that's a little different.
KESTENBAUM: They don't know how their country is doing either. In that WikiLeaks cable, the prime minister said that when he wants to understand the economy, he ignores GDP. He looks at these other numbers.
WILLIAMS: One of the alternative indicators that he said was better to look at was electricity output. So ever since he said that, actually, people have now started to say, well, hang on a minute, maybe that's what we should be tracking as well.
KESTENBAUM: This is kind of clever because, you know, power plants have these meters, right, so you can tell exactly how many megawatts they put out. So just add up all those megawatts. If more factories are being built, they are going to use more electricity. If factories are running through the night because the world wants more iron pipes or computer chips or sweaters or whatever, then those factories will need more electricity to run. So electricity usage should go up. It tells you something about GDP.
GOLDSTEIN: And when Mark Williams wants to know how China's economy is doing, he does what the prime minister does. He looks at China's electricity usage. He looks at how much cargo is moving through Chinese seaports. He looks at how much real estate's being built. He puts those numbers together with a few others, and he calculates his own version of basically China's GDP growth.
KESTENBAUM: There's actually a whole industry of people like Mark trying to calculate their own version of GDP. Like, what is going on in this country of a billion people? Investors and businesses around the world, they pay him for his numbers, for his calculations.
Do you think China's economy is slowing down?
WILLIAMS: Oh, without doubt, without doubt.
KESTENBAUM: How worried should we be?
WILLIAMS: I don't think that we're seeing the economy collapsing, which is what a lot of people are arguing right now. We're just seeing a period of weak growth.
GOLDSTEIN: By his calculations, China seems to be growing at about 5 or 6 percent, which is not as good as the official numbers. But it's much, much better than what people like Christopher Balding at Peking University are afraid of.
KESTENBAUM: Mark Williams says the truth is nobody really knows what China's GDP is. Nobody really knows how quickly the economy is growing or how slowly. He says it's possible in his calculations he is missing something because China's economy is changing in this huge way. It's making this big shift in a way that's kind of hard to measure.
GOLDSTEIN: Yeah, when you look at China's economy today, it's like there are these two separate parallel economies. You can call them the old economy and the new economy. Ted Wang, the hedge fund guy, he walked us through this.
WANG: In the old Chinese economy, so you have real estate. You've got infrastructure. You've got factories. That's the economy that has really driven China's growth over the last 20, 30 years.
KESTENBAUM: Think giant factories making stuff to sell to the rest of the world, you know, construction crews pouring cement to make skyscrapers and airports. That is the economy that you see when you measure how much electricity is being used and how many containerships are leaving the port. And that is the economy that people worry about, where growth is clearly slowing down. But then, you have this other economy, what Ted calls China's new economy.
WANG: Well, the new economy is you have 200, 300 million people that's becoming a very, very robust middle class. And they want to have, you know, better health care, better quality of living, better education, better entertainment.
GOLDSTEIN: And those are the kind of things that are not captured by, say, electricity usage. You know, if you shut down a great big steel factory, somebody else opens up a high-tech startup. You're going to see electricity usage fall because the high-tech startup just doesn't use that much electricity.
KESTENBAUM: But it could be doing something better than making iron pipes.
GOLDSTEIN: It could be adding a lot more to the economy, even though you wouldn't see it in, you know, shipments leaving the country.
KESTENBAUM: Ted says this new economy, that is where the growth is. He saw it on his trip to China this summer, and he sees it in his own family.
WANG: My sister runs a 10,000 square feet coffee shop called Omar's Coffee. It's O-M-A-R, Omar's Coffee.
GOLDSTEIN: That's a giant coffee shop. I don't think I've ever seen a coffee shop that big.
WANG: And there is now five coffee shops like that.
GOLDSTEIN: All in Ted's hometown, a place where, when he was growing up, there were no stop lights, a place where the house that he and his sister grew up in had no running water. They had to go to the well to get water.
KESTENBAUM: In just one generation, there's been this astounding change in China. Now there are lots of people in his hometown who live like the global middle class. You know, they go out for fancy coffee. They buy cellphones. They take vacations. They go to movies.
GOLDSTEIN: So when you step back and you say, all right, bottom line, what is happening with China's economy? Ted says you have to balance that slowing old economy with this new growing one. But he says a lot of people, when they look at China's economy, they don't really do that.
WANG: On one side of extreme, you have people saying China is totally, you know, it's crashing. You look at the stock market, look at their, you know, their economic numbers, totally not trustworthy. Exporting is slowing down, you know, and China is crashing. And you have on the other end of spectrum, you have people who say China is going to be the superpower, going to take over the United States. The truth is both are probably wrong. Truth is probably closer to the middle.
GOLDSTEIN: Everybody agrees that as China keeps shifting from that old economy to the new economy, it's going to grow more slowly because for the last 30 years, China was going through what's called catch-up growth. It went from a nation of being a billion poor farmers to a country of coffee shops and factories and malls.
KESTENBAUM: And once you catch up, you do not grow as quickly because progress gets harder. And that is where China may be soon.
(SOUNDBITE OF SONG, "CATASTROPHE")
ZOUMA: (Singing) So treat them like your friends. You know that makes it worth. You know this change is physical.
KESTENBAUM: We talked to a lot of people for this podcast. A special thanks today to Jim MacGregor, Elias Glenn, Eswar Prasad, John Lin, Fred Hu and Arthur Kroeber.
GOLDSTEIN: You can email us at email@example.com. You can follow us on Twitter @planetmoney. Our show today was produced by Jess Jiang. And if you are looking for another show to listen to, try the Ted Radio Hour with the great Guy Raz. Coming up on that show is a two-part series about our relationship with screens, with our phones, with our computers. You can listen to Screen Time on the Ted Radio Hour starting this Friday, September 11. You can find it at npr.org/podcast, on the NPR One app, or wherever you get your podcasts. I'm Jacob Goldstein.
KESTENBAUM: And I'm David Kestenbaum. Thanks for listening.
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