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China meets its official growth target. Not everyone is convinced (www.economist.com)

submitted 1 day ago by [email protected] to c/economy

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[–] TheDemonBuer 2 points 1 day ago (1 children)

Moreover, despite the efforts of China’s macrodata refiners, some troubling statistics remain. The economy’s apparently brisk growth was accompanied by sustained deflation. Nominal growth, which makes no adjustment for price changes, was only 4.2% last year, once revised data from China’s recent economic census is factored in. That was the second-weakest figure since the 1970s. It implies prices across the economy fell by more than 0.7% last year.

The mismatch between strong GDP and weak inflation strikes many economists as odd.

Why is that odd? If prices come down slightly, that might be the thing that gets a consumer to pull the trigger on a purchase they've been thinking about making. And even if the price per unit is down slightly, if volume is up enough, the result is growth.

[–] jrs100000 2 points 1 day ago (1 children)

Yes but then the economy should be heating up and prices increasing, not declining. Strong GDP growth in a deflationary environment most likely indicates that either there is a concerning market distortion or that the numbers are fudged.

[–] TheDemonBuer 2 points 1 day ago (1 children)

Yes but then the economy should be heating up and prices increasing, not declining.

Not if production is managed sufficiently so that the supply of goods can keep up with an increase in demand.

[–] jrs100000 1 points 1 day ago (1 children)

Then demand for raw materials and labor should be trending up, both of which drive inflation. It would also mean that there is significant excess capacity, either due to subsidies or over investment. In this case were probably talking about housing, so the data might indicate that they have significantly overbuilt and are continuing to accelerate this overbuilding to juice GDP numbers, which will put further deflationary pressure on the market.

[–] TheDemonBuer 2 points 1 day ago (1 children)

I think you're not accounting for the extensive state planning that the Chinese government does. The state operates many key industries in China, and can direct those industries to increase production fairly rapidly.

[–] jrs100000 1 points 1 day ago (1 children)

That would be the possibility of concerning market distortions I mentioned earlier. They could totally be neck deep in pyramid building schemes or running unprofitable factories at a loss just to keep production up. This should still be putting inflationary pressure on the market, as material and labor markets should be heating up, but other factors might be pushing aggregate inflation down. For example, they might be building many billions of dollars worth of new condos while housing prices fall. Material and labor prices might be rising, but declining housing costs are pushing inflation into negative rates despite that. A free market economy would reduce construction in that case and the economy might slide into a recession while housing prices stabilize, but China could order SOEs and even private companies to keep building anyway. This would keep GDP growing, but would have other long and short term consequences.

[–] TheDemonBuer 1 points 21 hours ago

That would be the possibility of concerning market distortions I mentioned earlier.

Well, that's the thing: what you see as "concerning market distortions," China sees as prudent planning and oversight of the economy. Which one of you is right? I suppose time will tell, but I think the real point is that if you try to analyze the Chinese economy as you would a free market, it's always going to look kind of confusing or odd, because it isn't a free market economy.