On Chinese Economy

China official growth rate was 7.7% in first half of 2009 - this when its main customer for goods, US, was down over 6% in first quarter of 2009 and had negative growth in second quarter of 2009. And Europe, the other main customer, was contracting too. So how did an export economy like China grow that much? Daniel Lynch of Far Eastern Economic Review thinks the Chinese are making up numbers:

Beijing's insistence that GDP grew by 7.1% in the first half of 2009 is highly doubtful given that coal consumption by Chinese power plants fell 8.9% and usage of petroleum products (including gasoline) dropped 2.6%. In previous years, energy consumption consistently grew at a 7% to 9% rate. Equally remarkable, aggregate tax revenues fell 6% in the first half of 2009 after increasing by 17% to 31% in preceding years. The drop in tax receipts occurred at the same time as energy use fell.

Some analysts say there is nothing anomalous about these figures, . . . [but] [a]lmost certainly, the Chinese economy contracted after the recession began. . . .

There are other signs that the Chinese economy is not living up to its testimonials. For example, the explosion of credit and money has not been accompanied by inflation. M2—currency in circulation plus savings deposits—is reported each month to be, on average, 25% higher than in the comparable month last year. And new bank loans doubled in the first half and continue to increase at high rates. Yet consumer prices are reportedly down 1% to 2% year-to-date, while producer prices are off 7% to 9%.

Economics 101 teaches that if prices fall when the money supply is rising, either production must be increasing at a higher rate than money supply or the velocity of money changing hands must be falling. In China, the only market in which prices are consistently rising is the property market . . .[Notable & Quotable - FECR]

Also there has been lot of talk of China becoming a consumer economy instead of continuing to be an export oriented economy, which in large part played a role in current global financial crisis - China had to keep buying US treasury bonds, using the dollars it acquired to keep yuan down to enable exports, which kept US interests down helping leveraging up and spending binge by the Americans. Lee Kuan Yew, one of the few global wise men, talking to Charlie Rose, explains why the Chinese economic transition to consumption based economy may not happen anytime soon. In this hour long interview, Lee Kuan also talks about what issues will be paramount in the next few decades. First part of interview is here: