The recent publication of China's and the United States' 2014 GDP results has allowed a comparison of the growth of the world's two largest economies, resolving discussion of their relative economic performance with facts and highlighting serious misanalysis of China's economic development in parts of the media.
Taking first the objective data:
· In 2014 China's economy grew by 7.4 per cent and the U.S. economy by 2.4 per cent (see Figure 1). China's economy therefore grew more than three times as fast as the U.S.
China's GDP increased from 58.8 trillion RMB in 2013 to 63.6 trillion in 2014, i.e., by 4.8 trillion RMB. In dollar terms this was $780 billion measured at the exchange rate of Dec. 31, 2014, and $785 billion at 2014's average exchange rate. The US added $653 billion to GDP. China therefore added approximately $130 billion more to world output than the U.S. at market prices. This is shown in Figure 2.
· In 2014 the RMB's exchange rate fell against the dollar, thereby understating China's real output increase compared to the U.S. If measured at World Bank Parity Purchasing Powers (PPPs), China added approximately $1,300 billion to GDP compared to the $653 billion added by the U.S.
By whatever measure, therefore, China's economy considerably outgrew that of the U.S.
Such factual data is particularly illuminating in light of a consistent misrepresentation in certain parts of the financial media that China's economy is in a "crisis" or "severe slowdown," while the U.S. is undergoing "rapid growth." The data shows that, on the contrary, China not only continued to be the world's most rapidly growing major economy but continued to significantly outgrow the U.S.
A selection of headlines gives the flavor of what facts now show to have been unjustified "scare stories" about China. In January 2014, the Financial Times ran an article headlined "China's debt-fuelled boom is in danger of turning to bust." In April, another Financial Times headline declared "China's crisis is coming - the only question is how big it will be." In October, the American Enterprise Institute announced "An economic mess in China."
American academic Michael Pettis is a favorite source in such articles - the U.S. financial website Zero Hedge featured an article entitled "A Chinese Soft-Landing Will Inevitably Lead To A 'Very Brutal Hard Landing,' Pettis Warns." The Financial Times carried several articles by George Magnus, former Senior Economic Adviser to Swiss bank UBS, who predicts a coming slowdown of China's economic growth to 3.9 percent.
The contrast between such headlines and the actual economic results was therefore striking.
But such inaccurate material recycles a decades-old genre of what may be termed "fictional economics" predicting the coming "crisis" or "drastic slowdown" in China. This was not confined to fringe publications but involved persistently inaccurate projections by major Western media. For example, in 2002 Gordon Chang wrote a book entitled "The Coming Collapse of China," the thesis of which is self-explanatory. Chang argued, "A half-decade ago the leaders of the People's Republic had real choices. Today they do not. They have no exit. They have run out of time." Over a decade later, since time has not yet run out, one might expect that such an author's analysis would be disregarded. But instead, Chang was featured by Forbes and Bloomberg TV as a "China expert."
Another example may be taken from The Economist. In June 2002, the magazine produced a special China supplement called "A Dragon out of Puff." This report said of China, "The economy still relies primarily on domestic engines of growth, which are sputtering. Growth over the last five years has relied heavily on massive government spending. As a result, the government's debt is rising fast. Coupled with the banks' bad loans and the state's huge pension liabilities, this is a financial crisis in the making." The Economist's conclusion in 2002 was, "In the coming decade, therefore, China seems set to become more unstable." In reality, far from entering a crisis, China was about to enter the decade of the fastest growth ever experienced by a major economy in recorded history.
Why does such repeated inaccurate analysis of China's economy continue to appear in the Western media? It is striking that, during its economic reform, China has not underperformed its own ambitious projections but has consistently outperformed them. To graphically illustrate this, Figure 3 compares the Deng Xiaoping's projections for China's economic growth shortly after the start of the reform process with China's actual economic growth.
Deng Xiaoping's first stated target was to increase the size of China's economy by 400 percent between 1981 and 2000; the actual increase was 623 percent. The second goal was to increase China's GDP by a further 400 percent between 2000 and 2050, or a 1,600 percent increase between 1981 and 2050. In reality, China's economy had already grown by over 2,200 percent compared to 1981 by 2014. Deng Xiaoping's target was reached 38 years ahead of schedule! As regards China's latest stated goal - to double GDP between 2010 and 2020 - China is also ahead of its growth target.
Given such a reliable record over more than three and a half decades, China is clearly continuing to develop in line with the key goals officially reiterated by President Xi Jinping: "We have set the goal of completing the building of a moderately prosperous society in all respects by the centenary of the Communist Party of China in 2021 and building China into a modern socialist country... by the centenary of the People's Republic of China in 2049."
Outside China, understandably, there is less understanding of the framework of "socialism with Chinese characteristics" within which Chinese economic policy is designed, so it may be useful to use the recent explanation of why China's extremely high growth rate will continue provided by one of China's leading economists, Justin Yifu Lin.
In analyzing domestic China factors, Lin noted, "In 2008, China's per capita income was just over one-fifth that of the United States. This gap is roughly equal to the gap between the U.S. and Japan in 1951, after which Japan grew at an average annual rate of 9.2 percent for the next 20 years, or between the U.S. and South Korea in 1977, after which South Korea grew at 7.6 percent per year for two decades. Singapore in 1967 and Taiwan in 1975 had similar gaps - followed by similar growth rates. By extension, in the 20 years after 2008, China should have a potential growth rate of roughly 8 percent."
While Lin posited that China's average long term growth rate would be around 8 percent, shorter term projections must take external economic factors into account. Lin argued, "The external scenario, however, is gloomier… As a result, Chinese growth is likely to fall below its potential of 8 percent a year. As policymakers plan for the next five years, they should set China's growth targets at 7-7.5 percent, adjusting them within that range as changes in the international climate dictate. Such a growth target can… achieve the country's goal of doubling income by 2020." Indeed, a 7 percent annual growth rate from 2015 would result in China somewhat exceeding its target of doubling the size of its economy from 2010 to 2020.
Lin notes that the reason China can meet such targets also strikes to the core of an elementary economic error that leads to much erroneous media analysis of China. Lin states, "China has the potential to maintain robust growth by relying on domestic demand, and not only household consumption." Economically, in any country, domestic "demand" is not equal to consumption, as writers such as Pettis erroneously state, but is equal to consumption plus investment.
In reality, China has the world's largest investment resources. As Lin noted, "China's investment resources are abundant… private savings in China amount to nearly 50 percent of GDP… Even under comparatively unfavorable external conditions, China can rely on investment to create jobs in the short term; as the number of jobs grows, so will consumption." In a developing economy, investment accounts for 50 percent of economic growth on average, and in an advanced economy it accounts for 57 percent. It is therefore no surprise that China's much greater investment resources are leading its economy to continue to grow much faster than the U.S.
But why is China able to successfully carry out such investment programs, whereas in the U.S. numerous calls for increased investment in areas like infrastructure have not been implemented, even when publicly supported by such leading figures as former U.S. Treasury Secretary Larry Summers?
The reason lies in the fact that China is a "socialist market economy" not a "capitalist market economy." China possesses a state sector which does not aim to encompass the whole economy nor to administer it, but which is strong enough to set (and maintain, if required) China's overall investment level. As the Wall Street Journal accurately summarized, "Most economies can pull two levers to bolster growth: fiscal and monetary. China has a third option. The National Development and Reform Commission can accelerate the flow of investment projects."
No capitalist market economy, including the U.S., possesses such a powerful structure as China's "socialist market economy." This is why China's economy has continued to persistently outperform the U.S. and why all media predictions of disaster over several decades, and again in 2014, have invariably turned out to be false.
Another statistic casts further light on the situation. While sections of the media were running inaccurate stories on China's economy, foreign companies increased their investment in China from $123.9 billion in 2013 to $127.6 billion in 2014. As usual, companies - which have to deal with money and not propaganda - were more in step with economic reality than sections of the press.
For many years, I have made my living by supplying companies more accurate analysis of economies such as China than could be found in the Financial Times, the Wall Street Journal, and The Economist. Such publications have not been able to comprehend the superiority of China's economic structure to that of the West, and have therefore made repeated erroneous predictions. It seems that there are still openings in that field and, in light of the continuing errors in such publications, the factual record for 2014 again clearly shows that those seeking more accurate predictions of what will happen in China's economy will find these in China's media, from China's top economists, and in China's own growth projections.
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This article originally appeared at China.org.cn.