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# Simple Math Disproves China's "Staggering" Growth

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## "Miraculous" economic expansion is unsustainable.

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The Chinese non-export economy grew 23% in June! Before you start frantically Googling that number, let me warn you: You won’t find it. I’ve computed it using fifth-grade math.

Here is what we know: exports constitute about 35% of the Chinese economy and they dropped over 20% in June, while the Chinese economy (Gross Domestic Product) grew 8%. So the “X” is the growth rate of 65% of Chinese non-export economy.

0.35 x (-20%) + 0.65 x (X%) = 8%. If you were to solve for X, you get 23%.

Enough with math, let me put this number in perspective. Chinese non-export economy grew at 3 times the rate of their GDP. I only have 2, very contradictory, explanations for this:

1. The Chinese government is lying through its teeth about its miracle growth. It has the incentive to interrogate economic data until it confesses, and to make it conform to the party-line numbers. This is very plausible: For months, the Chinese government was showing positive GDP growth while its consumption of electricity was declining. Obviously, this doesn’t make much sense.

China also isn't famous for the production of intellectual goods (i.e. software, creation of toxic financial products -- that's our specialty), which scale a lot better and don’t require proportional electricity consumption to grow GDP.  (And just look at the government's recent troubles with Google (GOOG), Yahoo (YHOO), and Microsoft (MSFT)).

China makes stuff, and to make stuff you need a lot of electricity. And even if the growth is completely driven by building high-story buildings (even if they eventually collapse), highways, and schools, these activities still require a lot of electricity.

2. The numbers are real -- the monetary base was up 28.5% in June (again  if you can trust that number), and thus the quality of growth is horrible. I’ve discussed this scenario in great detail.

I hate to leave on open-ended note, but only time will tell what is actually going on in China.

P.S. I wasn't surprised to learn that Jeremy Grantham of GMO – a value investor for whom I have tremendous respect -- is concerned about the future of Chinese economy as well.

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