China's growth: still real
by Zachary Karabell, Tue Jan 26, 2010 at 06:34:57 PM EST
Cross-posted at River Twice Research.
This week, the Chinese government announced that China’s economy had expanded by a stronger-than-anticipated 10.7 percent in the last quarter of 2009 and that it had grown 8.7 percent for the entire year. This news, however, was not greeted with relief but with the skepticism that has typically met such news emanating from China in recent years. The Wall Street Journal ran a story on its front page with the headline “China Seeks to Tame Boom, Stirs Growth Fears.”
Because the news was accompanied by higher inflation, primarily the result of higher food prices, global markets reacted negatively, under the assumption that the government would soon begin to curtail credit extended by banks and would look to cool off the economy before it “overheats.” Beijing will almost surely try to curtail promiscuous credit, but only when domestic demand is strong enough to supplant it. And as for food prices, they remain a backdoor way for the government to transfer wealth from the cities (where most of the food is consumed) to the poor rural areas (where most of it is produced).There is no dearth of China skeptics, some of whom are actually in the Chinese government. But those have reason to worry–they are charged with maintaining the path that China is on and they need to be attuned to the slightest breeze that could develop into a fatal storm. Many who sell China short–some literally like hedge fund manager Jim Chanos–have less to stand on. The fact that China’s growth continues to be driven by state spending is seen as a critical flaw, and the ratio of consumer spending to trade and state-spending is seen as imbalanced and untenable, especially by long-time China watchers like Morgan Stanley’s Stephen Roach or the perma-pessimist Gordon Chang.
Most news on China is greeted with suspicion, or the suggestion that the numbers are cooked. The recent Google China controversy fueled that suspicion and obscured the degree to which some sectors of the Chinese economy–namely the New Economy of information and entertainment–are becoming robust and innovative and can compete with a dynamic powerhouse like Google.
As for the official statistics, sure, they are far from accurate, but then again, no government is able to precisely gauge in real-time what’s going on. The United States still revises GDP numbers years after the fact, sometimes substantially. But even inaccurate numbers give an indication that whatever formulas China is using to muddle through are working. Its much-criticized domestic consumption rose nearly 20% for the quarter and 15% for the year, in a year when much of the world was mired in recession. Critics say that domestic buying was “artificially” boosted by government subsidies, but how is that any different from tax relief and domestic stimulus throughout Europe and the United States? And trade fell only 12 percent for the year, in a year when the global economy and trade contracted more sharply than in decades.
No doubt, China’s trajectory will include bubbles forming and popping (or most precisely, being popped by government policy). No doubt, that will have an effect on stock prices and sentiment in the short-term, mostly negative. But make no mistake: this story is not Japan in the 1980s, and it isn’t a flash in the proverbial pan. It is real; it is shaping the global system; and it will remake the economic landscape as surely as the emergence of the United States in the early 20th century did. Skepticism is healthy, but not when it becomes dogmatic and blinds the eye to real change. Overestimating China is a risk, but the consequences of underestimating it are far worse.
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