A great leap forward for Chinese appliances

What sound does a washing machine make without electricity or running water? Answer: The sound of a bubble popping

By Andrew Leonard
Published July 30, 2009 5:16PM (EDT)

So what is going on in China? A 5 percent stock market plunge on Tuesday in Shanghai (now the second biggest stock market exchange in the world) has incited much talk about a great Chinese bubble waiting to be popped. We know that the state has encouraged a vast expansion in bank lending to spur the domestic economy forward, most of which is going into public infrastructure projects but some of which is finding its way into the stock market and possibly real estate speculation. We know that GDP growth figures are eye-popping, especially compared to the rest of the world, but we don't know how much to trust them.

Perhaps most crucially, we don't really seem to know what is going in the all-important sector of domestic demand.

In March, I noted that there were nascent signs of a semiconductor manufacturing revival in Taiwan, spurred because China's stimulus package had included incentives for the purchase of appliances and other high-tech goods that incorporated advanced electronics. The latest reports from Taiwan appear to corroborate the observation that Chinese consumers are gobbling up such goods. Taiwan Semiconductor Manufacturing Corp., a linchpin of the global semiconductor industry, announced an "87.9 percent quarter-on-quarter increase in revenue for the three months to June," reported the Financial Times, based largely on "rising Chinese demand for electronics from Beijing's stimulus measures."

A great leap forward into middle-class amenities? A washing machine in every peasant's shack?

Well, maybe. I don't usually look to the resolutely right-wing American Enterprise Institute think tank for guidance on economic analysis, but "visiting scholar" John H. Makin makes a pretty good case that the Chinese approach to calculating economic growth statistics doesn't give us an accurate sense of what's really happening on the ground. And he adds some commentary specifically on the appliance front that, if true, contributes useful nuance.

There are anecdotal reports of Chinese households buying washing machines that were aggressively shipped and counted as retail sales during the first half of the year. However, many of the households that purchased washing machines, or were virtually given such machines, have found them unusable because their homes lack either the running water or electricity (or both) necessary to make use of a modern appliance. Such problems arise when ambitious planners count shipments as retail sales while end-use demand may be absent. In such cases, the "sales" are made to happen by virtually giving away the products that have already been produced and counted as GDP growth.

The image of washing machines sitting in homes without electricity or running water is uncomfortably reminiscent of what happened during the real Great Leap Forward, when villagers were encouraged to start up their own small scale iron smelting operations, and ended up producing little more than useless slag.

So how many Taiwanese semiconductor chips are ending up gathering dust in rural villages but still getting counted as part of official growth statistics? We don't know, but it pays to be cautious.

And on that note, I cannot resist plugging an amazing, even if essentially unrelated, Financial Times piece, "A Cautionary Tale in China," published a couple of days ago; a story of corporate betrayal in which the German CEO of an advertising company operating in China is bamboozled by his secretary and her husband, his corporate heir to be.

Best line:

"Li controlled everything and when he attended meetings the only thing missing was a pinky ring and a cat in his arms."

Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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