Beijing winning the right to host the Olympics is symptomatic of an unsubstantiated China fever. Those who chose to believe the promises made by the communist authorities to allow free and open reporting and to clean up the environment did so by suspending their sense of reality.
And so it is that many people choose to believe that China's economy will continue it heated pace of growth despite the economic doldrums afflicting much of the rest of the globe. Even so, China is widely expected to continue growing at around 7.5 percent this year. A pause is in order here since exports constitute one-quarter of China's GDP.
According to the official Xinhua news service, China's exports fell by 0.6 percent year on year to US$22.08 billion for June; compared with a 3.5 per cent increase in May and an 11.1 per cent increase in April. Consequently, export growth for the first half of the year was only 8.8 percent, after growing at nearly 28 percent last year. If such high rates of export growth were needed last year, how can high growth be sustained after such a sharp decline.
Attitudes about China's economy bring to mind the giddy notion that high growth in Japan Inc came from the discovery of a new economic paradigm. Whoops! Then, Japan's "bubble" economy unceremoniously blew up in the late 1980s. With so many people blowing hot air into China's balloon economy, those wishing to avoid injury when it crashes to earth should consider the following.
As it is, belief that Chinese growth rates can defy gravity by ignoring economic laws is based upon several mistaken beliefs. These are related and are based upon a faulty theoretical construct that prescribes manipulation of the demand side of the economy. In particular, a mistaken belief has it that increased consumption drives an economy, and similarly, that government spending can generate real and sustainable growth.
On the one hand, China's continued growth is being heralded as the result of strong consumer demand and domestic investment. Improvements in consumer confidence since early 1999 has contributed to rising domestic retail sales that grew by over 10 percent in the first five months of this year, reaching 1.5 trillion renminbi (US$181 billion).
On the other hand, a World Bank report estimates that public-investment will boost growth by between 1.5 and two percentage points to growth this year. Such spending is justified on the basis of a slowdown in export demand.
Let's check the logic. It turns out that sustained increases consumption are a consequence instead of a source of growth. Whereas loose credit can unleash a false sense of prosperity that promotes temporary boosts in buying, new rounds of sustainable consumption only come from increased employment and rising real wages that result from investments into productive activities.
Likewise, government spending only rearranges real assets. For net economic gains to occur, public spending must be more efficient than if used by the private sector. History offers few examples of this phenomenon, especially when corruption is as rampant as in China.
So what about the ability of China's economy to continue growing? It is said that a robust domestic sector of the economy will keep up growth, but that idea is based upon the two canards of economic logic cited above.
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