Myths and Truth about China

The Chinese economy may still be growing rapidly despite the financial crisis. One thing that has been growing even faster is misinformation about the Chinese economy. This is partly a function of unreliable economic numbers put out by China’s government, but it is also partly a function of mistaken American and other perceptions. Hidden within the sweeping pronouncements of "China’s decade" and "China’s century" are important, specific points–some of which turn out to be demonstrably wrong. This article is a part of original research work done by Derek Scissors, PhD: Research Fellow in Asia Economic Policy in the Asian Studies Center at The Heritage Foundation.

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).

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.

Myth #2: China could surpass the U.S. as the largest economy in 10 years.

Truth: There is a reasonable chance that China will never surpass the U.S.

One element in this forecast is the last 30 years of reported Chinese growth, the second is the last three years of American growth. The second element is far more important: If American growth remains at the 2007-2009 level, GDP rankings will hardly matter. The U.S. must focus first, second, and third on fixing its own policies–deeply cutting the budget deficit, steadying interest rates, expanding trade, and reducing government regulation, especially taxes.

If the U.S. takes these actions, China may not pass the U.S. at all, much less in the next 10 or 15 years. It is a fundamental mistake to graft the previous 30-year trend onto the next 30. The China of 1949 to 1978 looked nothing like the China of 1979 to 2009, and there are powerful reasons to believe that 2010 to 2040 will be very different again.

Myth #3: China will surpass Japan as the world’s second-largest economy in 2010.

Truth: China probably surpassed Japan several years ago.

As soon as February, the media could report that China has finally surpassed Japan. If not in February, then certainly over the course of 2010.

Every discussion of the Chinese economy, including this one, should be taken with a truck’s worth of salt. The officially stated unemployment rate is acknowledged to have little to do with true unemployment, announced sales volumes include millions of items never sold, and much announced foreign direct investment (FDI) is not foreign. The central government does not agree with the provinces and the provinces do not agree with their counties concerning GDP, FDI, and many other indicators.

Evidence for many economic statements is weak; but what there is suggests the PRC surpassed Japan several years ago.

Myth #4: China is America’s banker.

Truth: If there was ever any Chinese financial influence, it is not there now.

The U.S. federal government is running, and is expected to continue running, a gigantic budget deficit, which will hurt the economy for the next decade. China buys some of the bonds to finance that deficit and has about $800 billion in official holdings of U.S. treasuries, plus perhaps that much in other types of holdings.

Even so, the conventional wisdom–that America needs Chinese financing to continue its wild spending–turns out to be wrong. Partly because of the damaging jump in the size of the deficit, Chinese bond purchases have become irrelevant.

Official Chinese purchases of U.S. Treasury bonds are on pace to fall well below $100 billion for 2009 (the full-year total is published in February), while the federal government deficit soared to $1.4 trillion.

Myth #5: The U.S. and China are intensely interdependent–"Chimerica" has emerged.

Truth: China depends far more heavily on the U.S. than the U.S. depends on China.

China’s reliance on the U.S. is real, but takes a somewhat different form than commonly believed. It is true that China exports a great deal to the U.S. In 2008, American demand accounted for 7.4 percent of Chinese GDP.

That number has been falling, however, and will fall again for 2009. In terms of GDP, the PRC has substituted domestic investment for exports since 1998 and more substantially since global demand peaked in 2006.

The fundamental Chinese dependence is on the American-built and American-led international economic system. Because it invests so much, China produces far more than it consumes across a wide range of sectors. It has done so since the Asian financial crisis of 1997.

Without an export outlet, constant oversupply would generate crushing deflation and cripple genuine Chinese growth. Open global trade fomented by the U.S. enables China’s investment-led model to work, while serious American protectionism would ultimately make that model unviable.

This article is a part of original research work done by Derek Scissors, PhD: Research Fellow in Asia Economic Policy in the Asian Studies Center at The Heritage Foundation.

Hitesh Anand

I am a post graduate from Newcastle University, UK. I like studying and analyzing economic data and financial health of world.

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