Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

China's 'Bogus Boom'

Over at the American Enterprise Institute, John H. Makin reckons that China is engineering a "bogus boom

There have in recent times been a whole series of articles questioning the authenticity of China GDP statistics.

Makin, however, has another perspective on why China's targets are being met, improbable as it  may seem:
China's 8 percent output growth target will be met because 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. The U.S. stimulus package, for example, attempts to boost GDP by undertaking measures that will boost consumption, investment, and government spending. China, however, decrees measures that will generate recorded increases in production spending. Part of the Chinese stimulus package involves large transfers of funds from the central-government planners directly to state-owned enterprises and to fixed-asset investment projects that are aimed at public works spending largely under its control.
Makin then highlights the risks that China is courting:
China's aggressive attempts to maintain an 8 percent growth rate for an economy that is export-oriented in a world in which global trade volumes are collapsing carry substantial risks. It is already clear that China's ambitious production goals are outstripping the capacity of the domestic economy to absorb fully the output generated under those growth goals. Clearly, China's State Council, by overruling the central bank's wish to rein in rapid money growth, is prepared to risk higher inflation in order to keep China's economy on the 8 percent growth path laid out at the start of the year.


The worst outcome for China would be one that includes ever-rising inflation pressures, as money and credit flows augmented by "hot money" capital inflows push the inflation rate up to a level that threatens China's stability. Since that would be most likely under a scenario in which industrial economies are not recovering in the second half of the year, we could see a situation in which disappointment over the recovery in the big three economies coincides with disappointment about the sustainability of China's planned 8 percent growth path. That outcome would coincide with a likely bursting of the stock and property market bubbles that are inflating in China now on the hopes that a second-half recovery will validate China's goal of sustained 8 percent growth in 2009.