China's Growth Is Real
Zachary Karabell, 10.26.09, 02:30 PM EDT
The People's Republic high GDP numbers are no fluke.
On Oct. 22, China released its official data for economic growth, which showed the economy expanding at a torrid rate of 8.9% in the third quarter. That activity was fueled largely by massive construction and infrastructure projects initiated by Beijing and regional authorities, as well as by a sharp rebound in exports. Unlike the stimulus package in the U.S., which has been doled out in dribs and drabs, China put its $600 billion package to work almost immediately and backed that up with more than $1 trillion in loans. American banks, in contrast, have been hoarding deposits and loath to loan.
China's growth, however, goes beyond these GDP statistics. Retails sales surged in October by 15.5%, industrial production by 13.9%; car sales hit a new all-time high; and the housing market continued to boom. Meanwhile, inflation remains nonexistent, which in a fast-developing economy such as China is almost unheard of.
And yet, the headlines in paper after paper--and in a variety of Wall Street research notes--are best summed up by this in TheNew York Times, "China's rapid economic growth rate raise some concerns," and then in another headline inside, "Talk of stock bubble and an export slump." With Chinese equities up more than 65% this year and property values having surged even more, there have been murmurings that China may soon tighten credit, raise interest rates and succumb to one of several potential bubbles. And, say these voices, its economy is too dependent on state spending, not reliant enough on domestic consumption and still aided by a currency kept purposely and dangerously undervalued.
American coverage of the Chinese economy is like that of a weatherman who routinely begins forecast of sunny weather in the mid-70s by saying that because it didn't rain today, there will be a deluge soon. Meanwhile, when U.S. figures are released in a few weeks showing perhaps 3% growth based entirely on a weak dollar and inventory growth, many will hail the domestic recovery. But the fact remains that right now China, not the U.S., is the dynamic economy pulling the world along in its wake.
China has maintained a high level of growth for the past decade, and in many respects, for the past 20 years. While there's ample reason to be skeptical of the smoothness of Chinese official data that have rarely dipped below 7% growth and rarely exceeded 10%, if anything the official figures understate the success of the Chinese model. With as many of 800 million people still living in rural poverty, China's growth is the product of urban areas, many of which have been growing in the range of 15% for the past decade. That includes obvious examples such as Shanghai and less obvious but equally important interior cities such as Chongqing.
While the peculiar formula that China has adopted violates Western views about what constitutes the "right way" to grow, there can be no gainsaying the fact that China's recipe has proved more stable and successful than any of the orthodoxies propagated by the World Bank, by development economists and by countless economists today who continue to critique China as too dependent on state spending and "fixed asset investment" (i.e., infrastructure) and not enough on spending by consumers.
China has not only maintained its growth during the global crisis of the past year; it has tweaked and improved on it, so that more activity is now coming from the interior and western parts of the country rather than the coastal and export-oriented regions. Given that the development of the interior has only recently been a focus, it will take years, which means that there is no real end in sight for China's expansion. Yes, there will be bubbles, but what the critics have missed is that the growth of the past years has seen multiple bubbles form and pop--in Shanghai real estate, in stocks not once but at least three times, in export industries, and in loan growth and contraction. To those who warn darkly of another stock bubble, the response should be, so what? Shanghai can go up and down 75%--enriching and then destroying portfolios, elating and then depressing millions of investors--and the lumbering giant of the overall economy will continue to plow ahead.
In short, China's economy is for real. It's time for the rest of the world to stop waiting for it to halt or collapse and start preparing for it to grow more rapidly and more robustly than any country has in quite some time. It's time to recognize that because China's growth is inherently deflationary--providing goods and services to the world and for itself at lower costs--inflation is not in the cards any time soon but that China, as a hungry consumer of scarce raw materials, will put real pressure on the price of oil, copper, iron ore and every other commodity known to man. It's time to prepare for a world where China assumes an ever larger place, rather than treating current data like a short-term phenomenon that will pass (as Japan's did in the 1980s) and leave the U.S. once again the sole economic giant bestriding the world. That script is the past; China is the present, and the future.
Zachary Karabell is president of River Twice Research and the author of Superfusion: How China and America Became One Economy and Why the World's Prosperity Depends On It, which was just published by Simon & Schuster.
