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10 China Myths for the New Decade- Myth #1: growth

Posted by Author on January 30, 2010

Derek Scissors, Ph.D., Research Fellow in Asia Economic Policy in the Asian Studies Center at The Heritage Foundation, via http://www.heritage.org, January 28, 2010 –

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Myth #1: China is now the leading engine for global growth.

Truth: China detracts from the rest of the world’s growth in gross domestic product (GDP).

The standard procedure employed by those convinced of Chinese economic leadershipis to take every country’s GDP growth, add it all up, and check which economy contributed most to the global pile.[1] But that is not the way GDP works.

If a country successfully dictates trade terms and extracts a great deal of wealth from its partners, its GDP would grow very quickly while that of its partners would shrink or grow much more slowly. It would then seem this country is leading global growth higher while it is actually enriching itself at the rest of the world’s expense.

Behind this confusion is that GDP includes trade. A trade surplus adds to GDP and a trade deficit takes away from it. China runs the largest trade surplus in the world, which means the rest of the world runs a large trade deficit with the PRC.

From this perspective, China is not adding anything to global GDP growth. Using trade, China adds the most to its own GDP and takes away the most from the rest of the globe’s.

The distinction is between performance and welfare. China is outperforming the world but it is not contributing to global GDP. Just the opposite: Some of its gains are mirrored in offsetting GDP losses in the rest of the world.

China has contributed a great deal to the world economy. Competition is the life-blood of long-term growth, and competition from Chinese goods has arguably been the largest contributor to competition in the global economy over the past decade. In terms of policy, Chinese production kept consumer prices down worldwide, helping to keep inflation low despite high levels of government stimulus around the world.

The financial crisis has changed this. Previously, Chinese supply was helping to meet strong global demand. Now, Chinese supply is threatening to overwhelm weak global demand. Rather than leading, China is using the world to boost itself higher.

It need not be so. The PRC could encourage the development of its domestic economy for the sake of its own people. This would increase demand for goods produced in the rest of the world. Then, and only then, China might be an engine for the global economy.(to be cont’d)

Original from The Heritage Foundation

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