E c o n o m i c O u t l o o k
China’s economic statistics have become the envyof the world. On July 15, China reported a 7.9 per-cent growth rate for the second quarter of 2009compared to the same period a year earlier. Mean-while, China’s stock markets are on fire, and itsproperty markets are heating up fast as well. Shang-hai’s two stock markets are up 75 percent and95 percent respectively so far this year. The morewidely traded Hong Kong Index is up 27 percent, astellar performance compared to largely flat stockmarkets in the United States, Europe, and Japan. Ineven stronger contrast, Russia, which is one of China’semerging-market peers, has seen itseconomy drop by 10.1 percent during the first half of this year, while its stock market has struggledas well.
China’sGrowth Story
It is important to understand how China’s remark-able reported economic performance is possible inthe midst of a global recession. True, China enactedamassive stimulus package last November worthabout 14 percent of GDP and aimed at boostingdomestic demand as exports fell sharply. Andexports are indeed still falling. As of June, China’sexports were declining rapidly, at a year-over-yearrate of 21.2 percent. Just two years ago, in 2007, itsexports had grown 21.6 percent, but that was thelast year of the global economic boom.Make no mistake: China’s8percent growthtarget for 2009 will be achieved, almost by defini-tion. Whether or not that is a healthy outcomedepends upon how you look at it and upon under-standing just how China’s economy functions andwhat China’s growth “accomplishment” means.Chinese economic data are constructed very dif-ferently from the roughly comparable U.S. statis-tics, so that looking at Chinese data through a lensconditioned by U.S. data-building and reportingconventions can be misleading.China has a planned economy; policymakershave substantial control over the path the economytakes and certainly over the path of reported data.Consider, for example, events that transpired inthe global economy at the end of last year andtheir impact on China’seconomic policymakers.After the financial panic following the demise of Lehman Brothers, real economic activity, and par-ticularly activity in the global traded-goods sector,virtually collapsed during the fourth quarter of 2008 and the first quarter of 2009. Chinese plan-ners reached a decision in November 2008 to pro-vide a massive stimulus program (equal to about14 percent of GDP or about RMB 4 trillion) tobolster Chinese growth. In fact, they were revers-ing what had been measures aimed at slowinggrowth by restricting money and credit flows. Thequick transition from tight to easy credit condi-tions was accompanied by measures directed atboosting domestic demand and infrastructurespending in particular.While the entire stimuluspackage probably was not an addition to existingplans, and probably will not be fully implementedduring 2009, it is sufficiently large to generate8percent growth during the year—at least in theway China measures growth.China’s 8 percent output growth target will bemet because China’s economic statistics are basedon recorded production activity, rather than being
China: Bogus Boom?
By John H. Makin
E c o n o m i c O u t l o o k
August 2009
John H. Makin (jmakin@aei.org) is a visiting scholarat AEI.
1150 Seventeenth Street, N.W., Washington, D.C. 20036202.862.5800www.aei.org
ameasure of expenditure growth—defined as the sum of consumption, investment, government spending, and netexports—as U.S. data are. The U.S. stimulus package, forexample, attempts to boost GDP by undertaking measuresthat will boost consumption, investment,and government spending. China, how-ever, decrees measures that will generaterecorded increases in production spending.Part of the Chinese stimulus packageinvolves large transfers of funds from thecentral-government planners directly tostate-owned enterprises and to fixed-assetinvestment projects that are aimed at pub-lic works spending largely under its control.Once China had announced its 8 per-cent growth target, it began to disbursefunds directed at a sharp increase inpublic works spending. It is important tounderstand that the disbursal of funds isrecorded as GDP growth. So the govern-ment can easily control the pace of growthby the pace at which it releases funds thathave already been allocated in the stimulus package to thecreation of higher production or growth numbers. Fundsdisbursed for fixed-asset investment by state-owned enter-prises or provincial governments are counted as havingbeen spent when they are disbursed. In fact, the funds goout to the state-owned enterprises and provincial govern-ments and may be held until actual projects are identifiedand undertaken.The same convention, counting production and ship-ments as de facto outlays by end-users, is employed withrespect to retail sales data in China. Shipments to retailersare counted as retail sales on the apparent assumptionthat ultimately all goods shipped will be sold at somepoint in the future. China’s nominal retail sales have beenrising at a rate of about 15 percent year-over-year duringthe first half of 2009 because that is the rate at whichshipments to retailers have been occurring. There isvery little direct data available to measure actual sales byrecipients of the retail shipments to ultimate consumers.The problem with China’sapproach to the economicdata, counting shipments as sales and funding of projectsas projects undertaken, is that there may be substantiallags in the real impact of government programs as well assubstantial lags in actual spending on goods shipped toretailers. China’s policymakers can monitor the potentialgap between demand growth and the production numbersrecorded as GDP growth by watching the progress of infrastructure projects being funded and by monitoringinventories of unsold goods. Unfortunately, outside obser-vers cannot monitor such progress since the informationon inventories and the progress of actual outlays on infra-structure projects is not publicly available.It is possible, however, to make infer-ences about the pace of demand growthrelative to production or supply growth inthe Chinese economy by watching thebehavior of the central bank and its con-trol over the growth of money and credit.If policymakers observe that demandgrowth and progress on infrastructureprojects is lagging behind announced pro-duction-side GDP data, they can attemptto boost demand growth by increasing thegrowth of money and credit. Such growthhas accelerated sharply during the secondquarter in China, indicating that whilethe measured pace of China’s increase inproduction is rising, the public works pro-jects and actual spending already recordedare falling behind schedule.
Money and Credit Spike Upward
Chinese measures aimed at boosting demand growth tomeet ambitious production growth targets intensifiedsharply at the end of the second quarter.In June, growthin the money supply measure known as M2 surged to28.5 percent year-over-year—up sharply from a 15 per-cent rate at the beginning of the year, which was far moretypical of the pace of money growth over the past decade. New loans by banks rose by about $1 trillion, or twice theexpected rate, during the first half of 2009 and rose34.5 percent year-over-year in June from a 30.6 percentgrowth rate in May. It appears that Chinese policymakersare experiencing difficulties in prompting total spendingto match their ambitious growth targets implied by aproduction growth target of at least 8 percent, and so theyhave allowed a rapid surge of money and credit atmidyear.The resulting floodof money has—somewhatcounterproductively—flowed into stocks, property mar-kets, commodity stockpiles, and consumer durables (withthe help of special incentives for purchases of durables).There are anecdotal reports of Chinese households buyingwashing machines that were aggressively shipped andcounted as retail sales during the first half of the year.However,many of the households that purchased washing
-2-
It appears thatChinese policymakersare experiencingdifficulties inprompting totalspending to matchtheir ambitiousgrowth targets, andso they have allowedarapid surge of money and credit.
machines, or were virtually given such machines, havefound them unusable because their homes lack either therunning water or electricity (or both) necessary to makeuse of a modern appliance. Such problemsarise when ambitious planners count ship-ments as retail sales while end-use demandmay be absent. In such cases, the “sales”are made to happen by virtually givingaway the products that have already beenproduced and counted as GDP growth.On a broader scale, part of theenhanced money-credit stimulus beingundertaken in China reflects concernsthere that global trade growth—especiallythat tied to U.S. demand—will notresume in the second half of 2009. In order to underpindomestic demand growth, China’s central planners arewilling to let the flood of cash boost stock and propertyprices in the hope that this will raise confidence suffi-ciently to increase spending inside China. This is a riskyundertaking, as reflected in the virtual doubling of theShanghai Stock Market so far this year and the reappear-ance of real estate speculation during the second quarter.Speculative flows into Chinese stock and property mar-kets have become so intense that authorities fear anyabrupt cessation could burst the equity bubble, especiallygiven that the state-owned enterprises and other recipi-ents of stimulus funds have purchased stocks themselvesrather than leaving funds idle until they can be disbursedfor actual projects and have already been counted in GDPdata as having been undertaken. China’s State Councilapparently has decided to overrule those at China’s cen-tral bank—the People’s Bank of China—who are worriedabout the bubbles and to keep the party going with con-tinued rapid money and credit growth.It is the intensification of efforts to use rapid moneyexpansion that serves as evidence that private consump-tion and private investment have remained weak eventhough they are difficult to measure since little data areavailable on such demand-side components of GDP.Meanwhile, as already noted, China’s export growthremains weak, with exports dropping at a year-over-yearrate around 20 percent during the first half of 2009, aftergrowth rates of 17 percent in 2008 and 25 percent in 2007.Having announced a stimulus package that will boostdomestic demand in order to compensate for the loss of export growth on overall economic growth, China’s plan-ners are not about to risk any cessation of the intense mon-etary stimulus currently underway.That said, there aresigns that problems are emerging from China’s growthpolicies that amount to assuming that supply creates itsown demand with the help of adequate monetary stimulus.
Goods Inflation Still Absent . . .
China’s year-over-year consumer priceindex inflation rate is still negative, mostlybecause of far higher energy prices lastyear. But the threat of higher future infla-tion is emerging and has raised publicconcerns at the People’s Bank of China.The surge of Chinese flows into the stockand property markets has been intensi-fied by rising foreign capital inflows toChina.Foreign investors are starting to pile on to China’sliquidity-driven flows into those markets. An estimated$25 billion of “hot money” (inflows less trade surplus andforeign direct investment) surged into China in June.This may not end well—bubbles burst even in China—but it probably has a way to run, taking Chinese stocks,property, and commodity prices with it. There has been, andwill continue to be, some positive spillover into prices inglobal commodity and stock markets as we saw in mid-July.
...But Asset Prices Accelerating
The big risk from higher inflation in China lies with theproblems faced by typical Chinese households withwealth storage. Chinese households save a high portion of their income because they have to provide, on their own,for health care, retirement, emergency outlays, and otherneeds that are provided by governments in most advancedeconomies. Typical households have limited alternativesbeyond stock-market and property speculation as ways topreserve wealth in an environment of rising prices. As wemove into the second half of the year, year-over-yearinflation will almost certainly pick up in China simplybecause last year’s rapid run-up in energy prices happenedduring the early part of the year and abated later in theyear. So year-over-year comparisons will shift from a refer-ence point with very high prices to one with more mod-erate ones. Already,the house price index in thirteenmajor cities has risen about 13 percent from its Februarylow, suggesting that easy financing and concerns aboutrising prices are pushing Chinese households andinvestors rapidly into the property market. China’s deci-sion to allow this to happen as a way to boost overalldemand and confidence is a risky one because it looks as
-3-
China’s export growthremains weak, withexports droppingat a year-over-yearrate around 20 percentduring the firsthalf of 2009.
of 00
Bogus Boom
1,505 Reads
Info and Rating
| Category: | Uncategorized. |
| Rating: | |
| Upload Date: | 08/20/2009 |
| Copyright: | Attribution Non-commercial |
| Tags: |
Leave a Comment