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The Truth About China’s Growth (2): report

Posted by Author on February 3, 2009

Derek Scissors, Ph.D. The Heritage Foundation, January 22, 2009 – (Cont’d)

Consumption Illusion

On closer inspection, the picture is no better. The benchmark measure for consumption is retail sales. This is followed with great interest within and without China on hopes that consumption will begin to drive the Chinese and even the world economy. In the fourth quarter, global consumption took a heavy blow, but implied (from incomplete revisions) growth in Chinese retail sales was over 20 percent, on-year. For 2008 as a whole, retail sales soared 21.6 percent. This is a 13-year high and considerably faster than the (unrevised) 16.8 percent rise in 2007.[4]

Unfortunately, such an increase is very hard to believe. Passenger car sales added 7.3 percent in 2008, much slower than the 21.7 percent jump registered in 2007.[5] Sales of residential real estate plunged an unprecedented 21 percent through November.[6] What are Chinese consumers buying? Not imports. Import volume–the only verifiable element of consumption–fell 8.8 percent in the fourth quarter.

While all this is disturbing, there is a more fundamental problem. Per capita rural income was said to climb 15 percent in 2008 while per capita urban income climbed 14.5 percent. Real urban income somehow accelerated noticeably in the fourth quarter though GDP decelerated sharply. Even if that is true, incomes trailed sales by a good margin.

This should indicate that personal savings growth was small, as most income went to spending. But household deposits soared 26.6 percent. Individual Chinese are said to be both spending and saving much faster than they earn.[7] Moreover, saving was said to sharply accelerate while the economy slowed–as to be expected–yet retail sales still hardly slipped at all. In this light, it is difficult to credit rapid consumption gains.

Knockout Blow from Power

The Chinese economy’s last serious slump was during the Asian financial crisis. It is now widely accepted that official GDP growth for 1998 and perhaps 1999 was heavily exaggerated. Evidence was first found in power consumption growth, which dropped like a stone in the late 1990s while GDP growth merely moderated. Last year was 1998 all over again. (to be cont’d)
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The Heritage Foundation

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