China's Growth Rates are Based on an Unstable Footing
John H. Makin | American Enterprise Institute | August 2009
With 8 percent growth rate for the second quarter of 2009, China appears to be the miracle of the global economy in these times of recession. To boost domestic demand Beijing enacted a massive stimulus package at the end of 2008. In leaders eyes demand should be stimulated through job-creation measures and the easing of credit. However, appearances are deceiving. The aggressive endeavors by the Chinese State Council to achieve such high growth rates for its export oriented economy bears many risks in times of collapsing international trading volumes. Even a rise in domestic demand will not have the ability to compensate for falling export rates.
Despite the fact that the economic data is difficult to compare to the West, due to its distinctiveness, the strong growth in money supply in the second quarter suggests that the central bank considers job-creation measures and domestic consumption as not being sufficient. It is stimulating demand, despite rising production figures, which play a more significant role in the Chinese GDP than in the US. Growth rates in China are based on production figures and not on the sum of consumption, investment, government spending and net exports as in the US. In China funds which are allocated for job creation measures are also recorded as GDP growth. As a result, the growth of 2009 is primarily composed out of the stimulus package which has a volume of 14% of GDP.
Another problem is the easing of credit conditions which increase the money supply, which in turn raise prices. Private households in China are now trying to secure their savings against inflation. They invest in consumer goods, real estate and stocks - with consequences: The housing prices already increased by 13% in major cities. Both stock markets in Shanghai virtually exploded with 75% and 95% respectively which was also due to the attractiveness of foreign capital. Hence, it is worrying that the Chinese economy will not only experience a speculation bubble in the stock market, but also one in the property market.
The Chinese State Council seems willing to take that risk - despite the danger of rising inflation rates which raise living costs, which in turn could endanger social stability in the country. It hopes for a recovery of the US economy in the second half and for a stronger demand for goods "made in China" from abroad, especially from the US. But what happens when growth rates in the US, Europe and Japan will be, as many predict, at a rather low level? Experts fear that if that happens the risky game played by the State Council will not work. In the worst case scenario a possible burst of the speculation bubbles in the stock and property markets with coincidental high inflation rates would have serious consequences for the Chinese economy and thus also for the rest of the world.
This summary was prepared by the Atlantic Community editorial team from "China: Bogus Boom?" published here by American Enterprise Institute.
