Hey friends, for the first time a Chinese economist publicly claims that China is in a stealth economic depression and its real GDP growth rate is negative. That Chinese economist is cano. Yes, me. Let me ask you something. If your neighbor keeps bragging about his new Ferrari, but every time you see him, he’s pedalling a rusted bicycle to work. Do you believe the Ferrari exists, or do you believe the bicycle you can actually see? That’s China’s economy today. Beijing swears it’s growing 5%.
But the streets, the shops, the factories, the apartments, they’re all screaming in reverse. So here is my claim, and I’m going to repeat it until it’s tattooed on your brain. China’s real growth isn’t positive five, it’s negative 3%. Not slowing GDP growth. I’m talking negative growth. A stealth depression no economist in China dares to admit. And I’m going to show you plainly, simply, ruthlessly why negative 3% is the most honest number in the room. I personally lived the Beijing bone
Years. Back then you didn’t need a spreadsheet to feel the growth. It was in your lungs. You know the dirty dust from a thousand building sites. It was in your calendar. Deal flow packed tighter land subway line 10 at rush hour. You felt it. Taxis fighting for curb space at midnight. IPO dinners where the waiters sprinted. Property beating wars that made New York look tame. Now fast forward. Friends in Sunzen messaged me, Ken, my company cut hours again.
A restauranteier in Shanghai told me they close two days a week now because of no food traffic. A supply chain guy in Jang told me that half the warehouse lights are off. They have to keep the lights off to save electricity. university grads back in their hometowns delivering packages on scooters with master’s degrees. That’s not positive 5% growth. That is the economy in reverse with the gear stick duct taped so you can see it’s in reverse. And here’s the paradox. The worse things feel on the ground, the smoother the official number becomes.
Do you notice that real economies fluctuate? They hiccup, they stutter, they surprise. In China, the reported number glides like an ice skater. 6.5, 5.5, about five, always about five. always on message because it’s not a measurement, it is a slogan. So how do we break the spell? We stop arguing with propaganda and start measuring reality with tools Beijing does not control. I call this can’s negative3 rule. Five independent lenses. production, prices, sectors, satellites, and income each build from hard to fake signals. They converge in a tight band between -2 and -4. The me point, the honest headline is negative -3%. Not because it sounds dramatic, but because that’s where the mass keeps landing no matter which route you take.
And here’s the road map. Lens one, rebuild real growth using a clean deflator instead of the fantasy one. Lens two, do a bottom up sector accounting, real estate, industry, services, and weight them by reality, not propaganda. Lands three, a hard to fake activity dashboard. electricity, freight, diesel ports, night lights, pollution. Lens four, a satellite cross track. Calibrate nighttime lights to precoid growth and then apply to now. Lens five, the income side, household purchasing power and fund revenue in real terms. And then finally, I’ll add a bonus lens. I’m working on the dad drag. When the interest bill devours your growth, the real economy shrinks no matter what the press release says. All right, let’s go. Lens one is my clean deflator method.
Most people forget real GDP is just nominal activity adjusted by a deflator. If I can make the deflator small enough, I can turn flat nominal activity into a beautiful positive real number. Magic. Beijing’s magic. So, we don’t use their deflator. We build our own from scratch. First, we create a nominal activity composite things tied to actual transactions and cash. For instance, VAT invoice turnover, listed public company domestic revenues, nominal retail sales, bank credit creation, nominal fixed asset investment. No number is perfect, but this basket is harder to gain, especially if you sample across provinces and industries. Second, we build an alternative deflator that fits China’s actual structure. This is not the consumer CPI alone. China’s economy is investment heavy and industry heavy.
So consumer prices understate the actual inflation that matters for value added. Whereas producer input costs, service prices and debt servicing burdens act like effective inflation eating into real growth. So my reconstructed deflator leans heavily towards production service prices which include multiple sources like wage pressures, taxes, social security burdens, uh credit costs. I give three weight to PPI and 7 weight to the production service prices. And this reweighted deflator reflects actual reality. and coming out between four and 5%. Now do the math. If nominal activity in China is crawling at, let’s be generous here, positive1 to 2%. And your cleaner deflator is positive4 to positive 5%. Then real equals nominal minus deflator gives you -3% smack in the middle.
You can try to argue the nominal basket is wrong. Fine. Swapping other nominal proxies, commercial sales transactions, uh, toll revenues, ad spent, and watch how nothing you add pushes you toward positive five because nominal activity just isn’t there. And if nominal isn’t there, real can only be less. unless you cheat the deflator. And here’s the CCP’s trick. They tell you prices are falling at the factory gate, the PPI. So when you divide weak nominal GDP by a negative deflator, boom, real GDP looks strong. But that is like telling a starving man he’s eating more because his grocery bill is cheaper. In reality, when you wait the right prices, construction inputs, service costs, tax increases, and debt burdens, the economy is shrinking. My clean deflator isn’t negative -3. It is closer to positive4. And when you take weak nominal growth of maybe 1% or 2% subtract four you get negative -3% real growth.
That is the leaved economy. If the deflator is a lie the real number is a fairy tale. The honest mass says -3 and lens two is my sector accounting method. Now we go bottom up. If the biggest parts of your economy are shrinking, the whole pie is shrinking, right? Basic arithmetic. And that’s take three baskets. Real estate and construction around 20 to 25% of activity when you include upstream cement steel and the downstream furniture and appliances industry or manufacturing around 30%. And services around 50%. First real estate.
This is the crater you can see from space. Floor space starts collapsing, land sales collapsing, developer cash flow collapsing. If you deflate construction value added with construction materials PPI and adjust for those halted projects and delayed deliveries, you get a deep contraction. Pick your poison. -10% -12%. Even the rosiest scenario is ugly. This alone jacks the national number massively. You can’t lose a quarter of your economy’s growth engine and still be printing positive 5%. Unless your calculator came from a magic shop. And then industry or manufacturing.
People look at the headline industrial production and say see flat to positive you know slightly but that is nominal or just poorly deflated. If you deflate properly with my clean deflator and strip out inventory stuffing you know production for warehouses not for customers. The real picture is closer to zero to 2%. Exports margins are crushed. Domestic orders weak high-tech buzzwords, sure, but those gigaf factories didn’t feel empty shopping malls. And finally, services. The official line loves services because services feel soft and are easier to massage.
But you can pin services down with mobility data, hospitality occupancy, puzle volumes, ad spend, card spend on discretionary categories, and logistics activity. When you deflate services with a service CPI that reflects actual out-ofpocket prices, many service categories are either barely positive or negative in real terms. Ask any cinema owner in China. Ask private tutors who were annihilated by policy. Ask the cafe that now closes Mondays and Tuesdays because weekday traffic evaporated. Now we weigh it. We wait it. Suppose real estate and construction is uh 10% on a true value added basis. Industry is negative 1%. Services are negative -3 once you strip out uh government purchased services. weight loads by their actual shares and then the add-up lands you right nearg -3%. You can play with the weights and sensitivity analysis until your laptop melts but you will not engineer yourself to positive 5% without fantasy inputs. The sector mass doesn’t lie. It screens contraction.
When your largest sector is a sinkhole, there’s no way you can maintain positive GDP growth. And then l three is my hard to fake activity index. Propaganda can rewrite a a a report. It cannot easily rewrite electricity or diesel or the number of containers on a ship. So I built what I call the CAN negative3 dashboard, a composite of hard to fake inflows, including electricity consumption, diesel sales, which is the lifeblood of logistics and uh construction, freight volumes, rail, highway, and port throughput, container traffic, nighttime lights, job postings and hours worked, domestic air travel, actual paid seats, not scheduled capacity, toll road receipts, drivers either pay them or they don’t. E-commerce parcel volumes unit counts deflated by discounts tell a real story. We normalize each series relative to the 2019 baseline. split the dashboard 50/50 between production side and demand side and then map the composite index to real GDP using the precoid elasticity. That mapping is the key.
You basically calibrate the relationship when the data was less politicized before and then you freeze the model. No hindsight bias, no tinkering to get the answer you want. And what happens? The composite sinks to roughly.6 to.8 standard deviations relative to uh the baseline trend. Plug that into the pre2020 elasticity and the implied real growth is -2 to -4%. Again, the midpoint three. And this is not because I love the number three. It’s because every pass we take keeps dragging us back to the same address.
You know, like the Chinese economy’s GPS saying recalculating continue to negative 3%. I know what the skeptics will say, but less electricity efficiency improves. New energy vehicles consume less. E-commerce is just discounts. Great. Now adjust. Do the robustness checks. Even with conservative adjustments for efficiency gains and compositional shifts, the dashboard doesn’t change to positive three, let alone positive five. The physics of trucks and paid airline seats sets contraction, not expansion. And lens four is my satellite cross check. Fortunately, satellites do not read party slogans. The satellite looks down and captures how bright cities are at night. More brightness, factories, offices, homes, streets usually correlates with more e economic activity. Is it perfect? No. But it is gloriously indifferent to politics. And here’s how we make it rigorous. We take data from 2012 to 2019, the years before COVID data chaos, and run a simple calibration. Regress official Chinese GDP on nightlights growth to capture the structure.
We get coefficients coline elasticities that translate lights into growths and then we freeze the coefficients and we apply land to 2012 22 to 25 nightlights growth and the result the satellites whisper the same story negative lights growth decelerates in some regions it declines outright If the calibrated elasticity says that a given job in in brightness equals a contraction of x% we leave with that mapping and that mapping says what I have been saying -2 to -4 meg -3 the heavens are not bullish the heavens are honest you know the portfolio can muzzle economists but it cannot not threaten the stars space says -3.
Now lens five is about income side uh reality GDP is supposed to reflect incomes households and corporate if households are earning less in real terms and fs real sales are shrinking your GDP story is a bad time story and let’s talk households real disposable income per capita adjusted for the actual prices families pay, not the curated CPI basket, has been flat to down for many years. Ours worked down, use unemployment so bad they stopped publishing the data. That’s not a rounding error. That is a social signal flare. And when people feel poor and insecure, their precautionary savings go up. Rising savings rates plus falling real incomes equal negative real consumption. No matter how you angle the camera. Now ferns take a broad set of listed companies that primarily serve domestic Chinese market. Strip out the exporters. Strip out commodity price distortions.
Deflate their revenues using the appropriate sector PPIs, not CPI. What do you see? Real revenues shrinking or barely growing, margins squeezed, car packs deferred. When your income side is gasping for air, your GDP side cannot be training for a marathon. The two stories must reconcile. And the reality check says again contraction. If people earn less and businesses sell less in real terms, the GDP fairy tale belongs in the children’s aisle.
We grownups call it negative 3%. And finally, another lens, bonus lens that I’m still working on is the debt drag. And here’s the kicker. Even if you want to be generous and pretend nominal activity is okay, the interest bill alone is suffocating a system. Think government debt, local government uh financing vehicles, developers rolling paper at higher rates, corporates refinancing under stress. Estimate the effective interest burden and compare it to the incremental nominal GDP the system is generating.
If the new value you’re creating is barely covering or not even covering the uh interest on yesterday’s that binge then in real terms you’re shrinking. This is arismatic not ideology and this is why you feel the weird wipe of an economy that looks busy but it’s not getting anywhere. more loans, more rollovers, more bridges to nowhere. Activity without value added. It’s a hamster wheel. And the more you run that wheel, the more calories you burn without actually moving the cage. That is the definition of negative real growth.
Motion without progress, effort without value, bills without wealth. When your interest tab eats your dinner, you lose weight. China’s economy has been losing weight. Call it what it is, negative three. So, how did China turn this ugly reality on the ground into a grossy positive 5% growth story? A few tricks. Trick one, like we discussed earlier, the deflator massage.
If PPI is negative, you can cherry peak a consumer deflator that is even more negative or you can reweight uh the basket to reduce the bite of categories that are actually expensive for businesses. So if nominal is positive one and the deflator is conveniently -4, boom, real growth turns into positive five. The audience claps, the shops stay empty. And another trick is base revisions. Shift the weights to retail categories that look okay or tech categories that you claim are exploding and then shrink the collapsing construction and real estate weight just enough to keep the headline stable. And trick three is smoothing the number. The reported number from China is eerily smooth.
A real world that includes the biggest property collapse in modern history and a multi-year confidence shock from COVID does not print tidy about 5% growth forever. That is not resilience. That is just additing. I’ll say it exactly. China’s GDP number is not an economic statistic. It is a political outcome. And once you accept that, you stop arguing about decimal points and start looking at the the world as it actually is. Now, let me address the coming push back in the comments section and just crush it quickly.
Objection from the little pinks. But exports, well, exports can jump because of price effects, currency manipulation, oneoff orders, but domestic demand is still king and margins are crushed. Selling more at lower margins isn’t growth, it is survival. If factories run to keep the lights on while their profits vaporize, your value added is not growing. Objection, but retail sales are up. Well, nominal retail sales, yes, deflate them honestly. include various hidden fees these tech platforms are starting to charge and the real consumption is flat to negative discounting makes unit counts look robust while real revenue for these firms per unit false only governments think discounts create wealth objection but new energy EVs solar AI chips Well, these buzzwords don’t pay mortgages. A handful of sectors cannot offset the epic crater in property and local government financing. And many of those sectors are dependent on subsidies and export markets that are now tightening.
You can’t plaster a shiny solar panel on an enormous household balance sheet hall. objection but CPI is low so the deflator is small. Well again for an investmentheavy economy CPI is not the correct deflator for value added product services CPI matters and if you are in deflation that is actually a symptom of contraction not a badge of honor. Flat prices with falling wages as you claim equals misery, not growth. Objection. But we can see new projects everywhere in China. Well, so did the Soviet Union. Activity is not the same as value creation.
If you are pouring concrete to avoid layoffs rather than meet the actual demand, you’re just timeshifting a collapse. Objection. But the official number has international credibility. You’re just a random YouTuber. Well, international investors believed the ratings on sub prime cos too, right? Belief is not evidence. Our five senses are evidence. Satellites, diesel, freight, incomes. These don’t bend to press releases. Let me give you two pictures in China. You can’t unsee if you visit it.
Picture one, a mid tier developers sales office in a once hot city. Five years ago, it busted. Coffee machines hissing. Couples arguing about the floor plans. Sales agents, you know, tapping calculators like drummers. Today, the lobby lights are ding. The salesperson stares at a phone praying for a customer walk in. Prices are down, but buyers are still terrified. That is not positive 5%. That is a wreck. Picture two, a factory in the Yangzi River Delta. The line used to run three shifts. Now it runs one and a half.
Orders are unpredictable. The manager refuses to fire longtimers because he knows they won’t come back. But he also cannot raise their wages. So he cuts over time. Workers take home shanks. They cancel nights out, buy cheaper brands, skip the holiday chain home. Multiply that by tens of millions and tell me with a straight face that this is growth. It’s not. It’s -3. Now, why should the rest of the wall care? Why does this story matter? Why should we pay attention to this? Because mismeasuring China’s economy is a trillion dollar mistake.
If you buy the positive 5% fairy tale, you overbuild factories for a customer who is already shrinking. You overallocate capital to suppliers whose customers are overleveraged and undermployed. You model demand curves that never arrive. And you wake up with inventory you can’t sell and debts you can’t service. Sound familiar? It’s how bubbles end. What about investors? The pain shows up through earnings. Multinationals will talk temporary softness and then longer than expected normalization and then portfolio realignment and then finally after CFO retires structural decline translation they were pricing in positive five for market delivering negative -3 and hoping nobody noticed. Meanwhile, supply chains tilt to India, Malaysia, Mexico, not because geopolitics alone says so, but because growth moved elsewhere. For policy makers, clinging to the positive five means blinds you. You negotiate trade and security with a country you think is strong and growing and ascendant when it’s actually brittle and contracting. That misread can be catastrophic.
Weak systems lash out. Negative growth empires export their crisis. So I’m planting a flag here. Call this the can negative3 rule. Five independent lenses. One same answer. A cleaner deflator says negative. Sector mass says negative. The hard to fake dashboard says negative. The satellites say negative. The income site says negative. The dad drag seals this coffin. This is not a gas and it’s not a hot take I’ll abandon next week. This is a framework I’ve been working on religiously and I’ll update regularly with the same weights, the same mapping and the same methodology frozen to precoid calibration to avoid bias. If it changes, you’ll see it change on screen.
If it doesn’t, you’ll watch neg three negative three becomes like my slogan. -3 isn’t a mo is isn’t my mood. It’s a measurement. If you can’t feel positive five in your wallet, it isn’t there. Negative3 is what you feel. And let me speak plainly, a healthy economy doesn’t hide its use on employment data. It doesn’t muzzle economists who tell the truth. It doesn’t redefine the truth every quarter to match a political slogan. It grows and shrinks and stumbles and springs. It owns the struggle. China’s leadership doesn’t own the struggle. They own the story. And when politics owns the story, the real story becomes fairy tale. Look around a generation of young people doing lying flat not because they’re lazy, but because the economic ladder is missing rounds.
Families hoarding cash because their most precious asset, real estate, it’s still losing value. small businesses in China counting light bulbs at night to decide if they can afford to keep one on. This isn’t a small blip on a sort of miracle trajectory. It is the handover after a 30-year binge and the bark tender just cut up the credit card.
And hey, if I’m wrong, great. If the data turns, if the trucks rumble, if nighttime lights broom and income rise, I’ll be the first to sayg -3 has become one or zero or even positive2. I don’t marry numbers, I measure them. But today the measurements chant the same chorus minus three not for drama for honesty. So the next time someone in a suit on Bloomberg or CNBC tells you China is rolling at positive five, ask a simple question. Do satellites lie? Ask a truck driver if his diesel bill is up but his miles are down. Ask a mother if she canled her child’s up after school classes because you know her social security obligations went up.
Ask a landlord how many months they have been eaten vacancies especially for of you know office spaces. Ask a graduate how many interviews they didn’t get. That is your GDP. That is your real growth. That is negative -3 in human language. China’s printed GDP is a slogan. It’s real GDP is a shrinkage. And the most honest single number to hold in your head is negative 3%. So I’ll say it again. -3 for the live economy. -3 for the choose satellites can seegative -3 for the young people, the jobless, the shopkeepers, the factory hands, the homeowners who bought the dream and woke up in negative equity. The negative three is not my pessimism. Negative3 is real measurement minus the politics.
I’m Ken. This is the one place on YouTube where fairy tales in China go to die and data gets the last wall, the last word. And uh I’ll see you in the next one.
