Smokin’

20 April 2007



China’s Economy Grew 11.1% in First Quarter

The Chinese economy grew at a rate of 11.1% in the first quarter of 2007 according to recently released figures. This exceeded the 10.5% a poll of economists by Dow Jones Newswires had forecast. The government is worried that such rapid growth could readily turn into an inflationary nightmare. Their policies are working at cross purposes, and that is a much bigger problem.

On the one hand, China has set rapid economic growth as an end in itself because even communists know that it diminishes poverty. For that reason, the Beijing government has looked the other way as the nation dismantles the command economy and grows ever more capitalist. Quite simply, the Chinese Communist Party is prepared to sacrifice principle for prosperity. If the party would also give up on oppression of the people, this journal could even cheer for such calculating opportunism.

On the other hand, the government understands that growth beyond what can be readily absorbed by the economy is wasteful. During various Maoist fits of insanity (e.g., the Great Leap Forward, the Cultural Revolution), factories were built that the country couldn’t use, pig iron was produced in backyards to meet arbitrary quotas, and the real needs of the economy went unaddressed. So, the government is after rapid sustainable growth that lifts as many out of poverty in as little time as possible while not overheating.

In the first quarter, inflation was 2.7%, up 1.5 points against the previous year’s first quarter. The monetary authorities want inflation under 3 percent for the whole year, which is still double the 1.5% for all of 2006. In this regard, having the remnants of a command economy is useful in that government fiat can hold some prices level, or even reduce them – however, that merely achieves an inflation target at the expense of distorting real prices. Long term, that’s a losing policy.

China’s best option is to float its currency. Given current capital flows, it would quickly appreciate, making it harder to export, generate new opportunities in the import sector, and slow down the influx of capital to China that is over stimulating the economy. That would require the government to give up a fundamental control over the economy, but without a rising currency that reflects the reality of world trade and capital flows, the Beijing Communists are storing up trouble for the future. The current policy mix is designed to make everybody happy. and in the end, it will please no one.

© Copyright 2007 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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