China's first quarter 2010 11.9% year on year GDP growth rate is a stellar performance. It is not only by far the highest growth rate of any major economy but it was not accompanied by intolerable overheating.
The 2.4% year on year consumer price inflation is within the tight 3.0% inflation target set
by the government for the year. The 5.9% producer price in flation is not out of line with
other countries. Both consumption and investment growth is strong - urban fixed asset
investment was up 25.6% and retail sales up 17.9%.
There are of course inflationary pressures as China's State Council haspointed out. However
the fundamental macro-economic data indicates that these inflationary pressures should
not get out of control provided the economy is not a llowed to accelerate further.
The crucial factor in estimating that China's current growth is compatible with macro -
economic stability is China's Incremental Capital Output Ratio - that is the percentage of
fixed investment correlated with a 1% growth rate . This for China has been fairly stable at
around 3.7 for a prolonged period - this is shown in Figure 1 with a comparison to the US
and India. During this nearly two decade period no uncontrollable macro -economic
imbalances have occurred - indicating that this ratio is compatible with fundamental macro -
economic stability. On that basis an 11.9% growth rate would require 44.0% of GDP fixed
investment to sustain it.
The last published figure for fixed investment in China was 40.7% in 2008. It is evident,
however, from the breakdown of GDP growth in 2009, that the percentage of fixed
investment in the economy has increased further - probably to over 45% of GDP. This level
of investment in GDP should therefore sustain an 11.9% growth rate without macro -
economic distortions that could not be contained.
Significant further acceleration would, however, produce fundamentally destabilising
imbalances. A 13% growth rate, for example, would require a percentage of fixed
investment in the economy of over 48% of GDP - a level above China's.
The macroeconomic conclusion is therefore that at China's present rate of growth specific
economic problems, such as the significant housing price bubble, will be containable.
Significant further economic acceleration is, however, not containable and therefore the
Chinese authorities are correct to have commenced tightening measures to prevent further
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