China's Red Hot GDP Dilemma

Posted by: Dexter Roberts on January 21, 2010

China just won’t slow down. Double-digit fourth quarter GDP of 10.7% brings full year growth in at 8.7%—well above a government target of 8%—but also looks likely to heighten concerns of industrial overcapacity and market bubbles. Fueled by a $586 billion stimulus package plus a massive surge in lending, the mainland’s fastest growth since 2007 also saw a 30.5% surge in 2009 urban fixed asset investment. And with one-quarter of that investment coming from property construction, fears of a real estate bubble are spreading—that despite recent measures to rein in prices, as well as a December deceleration in property sales and construction.

Inflation too looks to be a central concern in 2010, with China registering a consumer price rise of 1.9% in December, the second month of the upward trend. There was some good news on China’s efforts to strengthen so-called private consumption (not the government-driven variety) as an economic driver: in a year where China ousted the U.S. to become the world’s largest auto market, retail sales were up 16.9% for the year, with urban incomes up 9.8% and rural one’s rising 8.5%. According to a note released today by CLSA Asia-Pacific Markets China strategist Andy Rothman, “China remains the best consumption story on the planet.”

Still, Chinese officials are getting nervous. China’s top banking regulator has confirmed that his agency is asking some banks to limit their lending and China’s premier Wen Jiabao said that China must “well manage” credit growth this year. China will limit lending to $1.1 trillion in 2010, down about 22% from last year, banking regulator Liu Mingkang announced in Hong Kong yesterday. And earlier this month, China’s central bank ordered lenders to raise their reserve deposits.

But pulling off a soft landing will hardly be easy. China wants to bring down growth to a more manageable level, but certainly doesn’t want to slam on the brakes too hard. If loan growth is reined in too sharply, that could injure companies already challenged by shrinking profit margins. If the property bubble is popped suddenly rather than slowly deflated, millions of workers in construction and related industries could lose their jobs overnight. At the same time, taking too slow action risks more overheating and an even harder landing down the road. As Beijing begins taking steps to cool its economy, policymakers have the difficult challenge of balancing those two contradictory needs.

Reader Comments

Rattatatata

January 21, 2010 10:53 AM

Unstoppable, now the coastal China is relatively affluent, the inland China needs to catch up. I give China another 20 years of high growth. By then, the GDP will be twice as large as the US and the per capita will still be only half of the US.

Strategery

January 21, 2010 5:59 PM

I think China is a bubble. Their economy will stop once it outgrows their natural resources (if it hasn't already).

khar

January 21, 2010 7:06 PM

China's story is always interesting...It is amazing how china always pulls out the one positive, and growth story regardless of the state of the world. Sometimes, I feel envious of China. But I guess it is always the case for human beings. We feel envious of people who are doing good.

I commend Chinese leadership for their achievement. I believe that China will continue to grow, continue to progress regardless of its state of politics. Just one reminder for the Chinese leadership; no matter what it does to control the flow of information and its political, China will become a freer, a more prosperous and a more democratic country. It is just a matter of time. For now, Chinese citizens are right to be satisfied with the states of their country politics because after all, we must remember that GDP per Capita incomes of average chinese citizens not much more than average annual income of those in the third world countries like India, Vietnum and Burma. Besides, when we compare average chinese citizens to average Indian citizens, the citizens of the so called world largest democracy, in every measures Chinese are far ahead-from the level of education to the level of information available to average citizens to the amount of credit, chinese are far ahead.

No matter what political system, people are free only when the means to make a decent living and express one's opinions freely without fear are available to them. In this regard, China is far ahead of many nations.

I also believe that when the average income chinese citizens reaches US$10,000.00, China will become a democratic country or at least semi-democratic. I am looking forward that time because it is when that happens that the world will have more people who could afford a decent human living than those who can't. Right now, there's just America and Western Europe the two populations is less than a billion, a fight of the world. With China, there will be more than 3 billions.

Wooohooo China.. and the chinese...

YX

January 21, 2010 9:23 PM

China will sail through 2010 and 2011 with a tail wind behind it. After 20 years, western financial or business journalists are still at a loss when coming to understand China. You guys should do away with the existing western economic theories, or should I say restrains, and construct a new framework. Till then, your worries (lol!) will stay as worries. 2010 is destined to be another successful year for China.

Robert

January 21, 2010 11:36 PM

I think China always Fakes its GDP Data.
maybe it take 25 years china have as big GDP as that of US today.

Shunjing

January 22, 2010 12:43 AM

Yep ! China is faking it . It is richer than it says. Mostly income goes unreported.

DEREK

January 22, 2010 1:11 AM

All these good figures are just man-made to prove to outside world that China is in good hand. However, talk to the people live in this counry generation to generation, it is not all as good as it shows at all. Honestly, I think governor has screwed things up out there.

C. H. Ng

January 22, 2010 1:21 AM

Fake? Or are you just jealous or simply just cannot believe her success story?

Being a Chinese myself (albeit not from China), I sometimes find it hard to believe at some of these things which are common in China....like how the ordinary men (or women) in the street can come out with a few hundred thousands yuan (in cash) to buy an apartment or a brand new car when you take into consideration their standard of income & difficulty in getting loans.
Or how places such as KFC & McDonald are virtually packed most of the time & where each meal for a family of 3 can easily costs them as much as a few days salary. You tell me...?!

Mohad

January 22, 2010 3:45 AM

If you talk with ordinary Chinese people, you will find they hardly believe these data is true. But China has to fake data showing China is growing fast.

frankly, I think China is really growing bigger, but not stronger. Like a man with too much fat, China is gainning more weight. So it becomes fatter. But the overweight may become very serious someday.

By the way, I heard China hired a lot of people to write short post supporting the governments. Maybe it also hires a lot oversea to write for the China communists, because I find some people doing so.

China Interest

January 22, 2010 4:17 AM

Rattatatata you obviously haven't spent a lot of time in China. It is in an unsustainable bubble. Massive one!!
There are empty retail stores, hotels, luxury residences, office space, and lots of stockpiled goods. Not the signs of good growth.

For a realistic view there are plenty of good places to find the information, try for start:
http://english.caing.com/2010-01-10/100106991.html
http://seekingalpha.com/author/michael-pettis/articles

Stuart

January 22, 2010 9:48 AM

Maybe China economy grows very fast,but average person only benefit litter
from it.

Brar

January 22, 2010 12:26 PM

Khar;

You provoke some good discussion. I agree, financial prosperity is necessary for civic democracy. But than, success of China will also promote change in definition of Democracy. Evidently, their would be schools of thought that would emphasize on importance of draconian controls on achieving collective prosperity. How else could you justify results?. You see, the democarcy that we all call today is an outcome of prosperity that Western countries had achieved in previous century. So what (Democracy)has been an outcome or result (of financial prosperity), can not be used as means to achieve same. I think that's what Chinesse leadership believes?

C. H. Ng

January 22, 2010 9:29 PM

I guess life at the top of the higher hierarchy in Communist China Party is no fun at all... no matter what decision they made, it will be forever treated as such:-

Brooking no dissident -- will be deemed as oppression of human rights & freedom of speech.

Banning of smuts & stringent controls on the internet -- became invasion of privacy & hacking.

Not in line with other members of the UN Supreme Council -- means she is uncooperative...not our "brother".

If in line -- "see? I told you so.. she is just a paper tiger"

Spending billions on military arms --
aggresive & therefore must be treated as future opponent/enemy.

Export too much -- triggers trade bans & imposement of tariffs in the west.

Import too much (iron ore) -- price increase & no yielding by the monopoly of the 3 mining giants.

Providing huge stimulus packages -- heighten fear of overcapacity.

Too much lendings -- bubbles here & there.

Restrict lendings -- markets crash.

Maintaining double digit growth -- really? no way...must be fake!

Aghh.....life really sucks...!!

All

January 23, 2010 1:06 AM

When the history of the 21 st century is written, the year 2009 will likely be marked as the moment when China, seen as merely rising for over a decade, finally arrived on the world stage. Its president, Hu Jintao, strutted around global gatherings as a rich banker, promising to help western economies flattened after the financial crisis. As the biggest creditor of profligate America, Chinese leaders lectured Washington to better manage their economy and protect the currency in which China has so much invested.
But historians will perhaps also note that behind all its preening and bombast as a new world power, China remained a deeply insecure country. When Uighurs rioted in Urumqi against the Han President Hu in July, he abandoned the G-8 meeting in L’Aquila to rush back home. After a prolonged ‘Strike Hard’ campaign by security forces, a six-month internet blockade was imposed across the entire Xinjiang Uighur Autonomous Region. The region’s budget for public security was nearly doubled. Since then, other signs of the regime’s nervousness have multiplied, reinforcing the notion that more than its growing power, China’s increasing sense of insecurity may be a matter of concern for the world.
Recently the Chinese authorities pulled the wildly popular Hollywood movie Avatar from all 2D theatres in order to release a patriotic biopic of Confucius. Rumour has spread on the internet blogs that Avatar provides inspiration for thousands of Chinese homeowners who were brutally evicted by developers much like the Na’vi people in the movie.
The Chinese Communist Party’s seeming paranoia about national stability and its own grasp on power have driven almost every disputed measure it has taken. When US President Barack Obama addressed a town hall-style gathering in Shanghai, all the attendants were carefully selected and even their anodyne questions and Obama’s uncontroversial responses (barring his stated distaste of censorship) were not allowed to be broadcast beyond Shanghai. The editor of a government-backed newspaper who secured an exclusive interview with Obama was demoted, even though he and the American leader discussed only the most harmless of topics. The impression was clear: any positive portrayal of an American president cannot be good for social stability.
With the latest sparring with Google, new evidence is filtering out about the lengths Beijing feels it must go to ensure stability. Google had already complied with Chinese demands by censoring searches for sensitive words, such as ‘Tiananmen Square and 1989’ and ‘the Dalai Lama’. But by locating its servers outside China, Google had managed to keep its users’ e-mails outside China’s reach – or at least so they thought. But it has since discovered a sophisticated attempt to break into its most secret source code by hackers located in China. The Gmail accounts of critics both inside and outside the country were found to have been mysteriously forwarded to some addresses in China.
Given the impossibility of conducting a thorough investigation in Chinese territory, the charges against China will surely remain unproven. But faced with Google’s public exposure of the threat to its business in China, a new line of rebuttals is in the making. Government-backed newspapers have accused Google of being “a convenient tool for promoting the US government’s political will and values abroad”. If China needed further proof of the nefarious plot to subvert its systems through the internet, it needed only to look at the US Congress. A group of senators have written to secretary of state Hillary Clinton to expedite spending of $45 million earmarked to support internet freedom in countries like China and Iran.
Meanwhile, China’s quest for security has been extended to the censorship of text messaging between cellphone users, to intercept missives that contain “illegal or unhealthy content”. Precisely what may be considered ‘unhealthy’ is not explained, but citizens who have grown up under the guidance of the Communist Party are expected to know what kind of words may be detrimental to their health. As with the Uighurs, Beijing is taking no chances. According to an official newspaper report, telecom providers will suspend the text-messaging function for users suspected of transmitting non-approved SMS content, in order to give the authorities time to evaluate the offending messages.
It seems for the world’s newest power there is no safe corner.

Taishan

January 23, 2010 1:32 PM

Not sure why there is even a debate on whether China's growth is fake or real. One only has to look at companies like General Motors. There is buzz about that more GM vehicles could soon be sold in China than in the US. If that fact was fake, then all of GM management, people in their financial circles would have to be in on the lie. Either GM is telling the truth about China's auto market or it would be a scam on a scale that would make make Enron look like amateurs. And the scam would have to encompass, not only GM but many other American companies. And not just American companies, but foreign ones as well. And all the developing countries selling their resources to China. Perplexing indeed, why in such a backdrop of overwhelming evidence of China's growth, it would be debatable.

C. H. Ng

January 24, 2010 10:55 PM

Dear @All

My friend, you are right when you talked about the rising China, her areas of weakness & her paranoid in maintaining internal security. But then it looks like you painted it in a rather one sided manner.

1) As the American's largest creditor --
you tell me WHICH creditor / banker is not worried of the large loan given to his client?

2) Riots in Urumqi -- as one writer rightly pointed out in his comment on this issue last year, IF such riots are to be committed by other minority community in another country, they (the minority race) would have been slaughtered by their thousands. And I don't have to highlight the countries as I believe you know it very well too.

3) Google's issue -- already mentioned in that blog...so no need for me to delve on that matter anymore.

4) Screening phone calls & sms -- what about the US government? Is she not doing the same thing or worse? Why you kept quiet on the "sins" she did?

5) On subversion & terrorism -- which responsible nation/government is not paranoid about such thing? Just look at all the high technology the US & western governments have been spending to thwart would-be terrorists!

Therefore kindly be more realistic & clear about the whole issues & no bias please.

@Taishan

January 25, 2010 12:17 AM

To Indian nationalists, any positive hard facts regarding China will be dismissed as fake; any delusional fantasies regarding India including India becoming the world's greatest superpower are hyped up as facts. No need to argue any more.

@Taishan

January 25, 2010 12:17 AM

To Indian nationalists, any positive hard facts regarding China will be dismissed as fake; any delusional fantasies regarding India including India becoming the world's greatest superpower are hyped up as facts. No need to argue any more.

MIke

January 28, 2010 3:17 AM

I have been in China for about 3 months now, what I have observed here is this:

China's GDP growth comes out from repetitve construction, putting it in a simple way: they build a road or a skyscraper, after few months, they pull it down and then, they build the same thing in the same palce again, few months later, they again tear it apart, and build it again. likewise, the GDP coming out from this project is counted 4 times. this is happening all over China, mainly in the cities. therefore, in China, you find everywhere is constructing and demolishing!

BUt, the goverment invests very little on its people's eduction, health, food safty housing so on! this is sad....China is making progress, Chinese goverement is getting rich but at same time Chinese people are suffering at bottom!

I believe, sadly. in the way of development like this, eventually, this country will go strait down, the booms will be short lived no matter what!

David

February 1, 2010 11:55 PM

Mike, you talked like you do not have brian. Does anybody believe your say? Chinese build, tear down and build again the same building? Either Chinese are studid or you are dream talking. What drug you have taken last night?

C. H. Ng

February 3, 2010 9:24 PM

@ Mike

This is the most ridiculous remark I ever read on this blog!! You said you have been in China for 3 months. Where or which part of China exactly may I know?
During your 3 months stay, you claimed to have seen skyscrapers being built (in 3 months??) only to be torn down again after 3 months?? Haha...you must be joking or there must be something wrong with your eyes!! Can you tell us which fools are there in this world who got so much money to build a building (no need to say a skyscraper) and then only to tear it apart after 3 months? You must be the greatest joker in year 2010...!

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