The Myth Of China GDP Growth

Third quarter GDP growth in China slowed to 9.6% from 10.3% in the second. Economists said this was a return to “normal” growth instead of an unsustainable expansion. It is, in fact, no slow down at all, if put in context. It is the equivalent of a drop in America’s  GDP growth from 2.3% to 2.15% which is not only negligible, but is within a range that would be statistically meaningless. Put another way, later revisions could show China’s GDP improvement may have been 10% or better.

The Chinese may use the number to show that its exports have begun to slow and that there is no need to adjust its currency. The People’s Republic has used arguments which are thinner than that. The figures could also be used to explain that consumption by the Chinese middle class has dropped due to the more modest growth which will not allow for rapid additions to the factory worker population.

China, economists say, still faces inflation, and the government has withdrawn stimulus and tightened bank lending rules to offset that possibility. The actions may indeed cut down the pace at which prices rise, but what the central government cannot do is curb the rise in core commodities and oil. The prices of these items have begun to inflate not just in China but around the world. So, China may be faced with rising prices during what it wrongly  describes as a cooling economy.

The Chinese are too intelligent and clever to allow their economy to be overrun by inflation which is caused as much by supply as by demand. Agricultural commodity prices have moved up enough so that food costs could become one of the greatest concerns in the People’s Republic. The antidote to inflation is in this case to increase the price that China can get for its exports which brings it back around to a need to manipulate its currency to keep exports high and its trade balance immensely positive.

The China GDP report means very little. What matters is that the country cannot avoid inflation because the cost of goods, many of which it imports, are beyond its control. That leaves it one choice: keep its export levels up and attempt to improve the margin it gets from each product that leaves its shores.

Douglas A. McIntyre