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Update on China’s 8% GDP growth
China has declared a target of 8% GDP growth for 2009 and from economic statistics released by the Chinese governments, it looks like they are on track to achieve this. This is very impressive considering Russia another member of the high growth “BRIC” nations (comprising Brazil, Russia, India and China) has just declared a -10.1% GDP growth recently. China’s growth was supposed to have come from increased domestic consumption. While China’s exports are down 20%, retail sales increased by 15% so it looks like domestic consumers have handily taken up what China used to ship to their customers in rich nations such as the US, Europe and Japan. How is that possible considering the average income in China is only USD2000 per year? Perhaps, the answer is clearer when we have a better understanding of how China measures consumption, which is very well explained in this article from the American Enterprise Institute (AEI). Below are a few highlights from that article:
- China’s economic statistics are based on recorded production activity, rather than being a measure of expenditure growth–defined as the sum of consumption, investment, government spending, and net exports–as U.S. data are.
- Funds disbursed for fixed-asset investment by state-owned enterprises or provincial governments are counted as having been spent when they are disbursed. In fact, the funds go out to the state-owned enterprises and provincial governments and may be held until actual projects are identified and undertaken
- The same convention, counting production and shipments as de facto outlays by end-users, is employed with respect to retail sales data in China. Shipments to retailers are counted as retail sales on the apparent assumption that ultimately all goods shipped will be sold at some point in the future.
Using the above measures, it is quite easy for the government to ensure the 8% growth target is met. The measure for retail sales reminds me of when I worked in IBM where sales was measured if we shipped to our business partners. Whenever a sales manager wanted to achieve a particular target, he would ask the business partners to take extra shipments just before the end of the financial year, even though there was no real end customer for the products. The products were simply returned the next financial year after the sales manager has collected his bonuses and moved to another role.
As China is Australia’s biggest trading partner, I would highly recommend reading the entire article which goes on to talk about the money and credit spikes, the acceleration of asset prices and risks ahead for China. If you are not into reading lengthy articles, below is a short video of a interview with Tom Orlik, the Beijing based China Economist for Stone and McCarthy, who gave a pretty balanced and factual summary of what he thinks is the Outlook for The Chinese Economy.
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