World Bank Lauds China Growth

The World Bank anointed China as the premier large growth economy. It reported that, while GDP improvements may moderate slightly, its 9.6% third quarter increase was surprisingly strong.

The World Bank downplayed the risks to China’s expansion which were buried in the middle of its evaluation.

“However, risks remain, including a weaker outlook in high income countries. Global price pressures remain contained by spare capacity in many countries, but raw material prices have risen again and there are upward inflation risks internationally.”

These risks are greater than the World Bank supposes because the cost of commodities will rise more rapidly than the organization estimates. The prices of agricultural goods and metal have accelerated by double digits. OPEC  stated that $90 oil will not hamper global growth. That is probably not true. Crude sold for under $40 less than two years ago.  Oil that is more than double that level while the worldwide economy is still weak is probably more than China can take without pushing core inflation higher.

The World Bank also underestimates the demand for Chinese goods. Large developed economies have begun to slip back toward recession. Much of the GDP improvement in the US and EU for the third quarter was restocking of inventory. That will not continue if GDP growth slows.

“Spare capacity” is also given short shrift in the report. Factory utilization is low enough in the West that many companies have no need to add workers to accelerate output. Nations will not necessarily turn to China for finished goods that they can create themselves. Western companies have figured out how to produce more for less.  Workers earning lower wages can make many products that used to be imported from the People’s Republic

Perhaps the most important thing that the World Bank assessment of China does not address is the real possibility of currency or trade wars. The agitation over the cost of goods China exports may only be at its beginning, especially if Western nations begin to struggle economically again.

China’s growth risks are large in number and growing. The World Bank glossed over that.

Douglas A. McIntyre