01.23.10
This week, the Chinese government announced that China’s economy had expanded by a stronger-than-anticipated 10.7 percent in the last quarter of 2009 and that it had grown 8.7 percent for the entire year. This news, however, was not greeted with relief but with the skepticism that has typically met such news emanating from China in recent years. The Wall Street Journal ran a story on its front page with the headline “China Seeks to Tame Boom, Stirs Growth Fears.” Because the news was accompanied by higher inflation, primarily the result of higher food prices, global markets reacted negatively, under the assumption that the government would soon begin to curtail credit extended by banks and would look to cool off the economy before it “overheats.” Beijing will almost surely try to curtail promiscuous credit, but only when domestic demand is strong enough to supplant it. And as for food prices, they remain a backdoor way for the government to transfer wealth from the cities (where most of the food is consumed) to the poor rural areas (where most of it is produced).There is no dearth of China skeptics, some of whom are actually in the Chinese government. But those have reason to worry–they are charged with maintaining the path that China is on and they need to be attuned to the slightest breeze that could develop into a fatal storm. Many who sell China short–some literally like hedge fund manager Jim Chanos–have less to stand on. The fact that China’s growth continues to be driven by state spending is seen as a critical flaw, and the ratio of consumer spending to trade and state-spending is seen as imbalanced and untenable, especially by long-time China watchers like Morgan Stanley’s Stephen Roach or the perma-pessimist Gordon Chang. Read more…