John H. Makin: China: Bogus Boom?

John H. Makin is a former consultant to the U.S. Treasury Department, the Congressional Budget Office, and the International Monetary Fund. He specializes in international finance and financial markets (stock, bonds, and currencies including the Euro and the U.S. dollar). He also researches the U.S. economy (including monetary policy and tax and budget issues), the Japanese economy, and European economies.From American Enterprise Institute website:

China’s economic have become the envy of the world. On July 15, China reported a 7.9 percent growth rate for the second quarter of 2009 compared to the same period a year earlier. Meanwhile, China’s stock markets are on fire, and its property markets are heating up fast as well. Shanghai’s two stock markets are up 75 percent and 95 percent respectively so far this year. The more widely traded Hong Kong Index is up 27 percent, a stellar performance compared to largely flat stock markets in the United States, Europe, and Japan. In even stronger contrast, Russia, which is one of China’s emerging-market peers, has seen its economy drop by 10.1 percent during the first half of this year, while its stock market has struggled as well.

China’s Growth Story

It is important to understand how China’s remarkable reported economic performance is possible in the midst of a global recession. True, China enacted a massive stimulus package last November worth about 14 percent of and aimed at boosting domestic demand as exports fell sharply. And exports are indeed still falling. As of June, China’s exports were declining rapidly, at a year-over-year rate of 21.2 percent. Just two years ago, in 2007, its exports had grown 21.6 percent, but that was the last year of the global economic boom.

Make no mistake: China’s 8 percent growth target for 2009 will be achieved, almost by definition. Whether or not that is a healthy outcome depends upon how you look at it and upon understanding just how China’s economy functions and what China’s growth “accomplishment” means. Chinese economic data are constructed very differently from the roughly comparable U.S. statistics, so that looking at Chinese data through a lens conditioned by U.S. data-building and reporting conventions can be misleading.


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