China’s GDP grew 9.8% in the fourth quarter of last year. The country’s consumer price index dropped to 4.6% in December compared to the month before. Experts will say that tightening by the central government has not hurt growth but has brought down inflation. Other evidence of rising oil and food prices would argue against that.
One of the most pronounced differences between the signals of the GDP growth rate and possible rapid inflation in China is the sharp drop in its stock market. Fear of inflation has trumped any excitement about the nation’s remarkable expansion.
China’s Shanghai Composite dropped another 2.8% overnight. It is down 10% in the last three months while the DJIA is higher by 6%. The growth prospects of the US are modest at best. China’s, however, are improving.
The concern among investors in China and economists is that the country’s growth will be undermined by inflation. Banks will tighten lending practices. The GDP growth rate in the world’s most populous nations will falter. The Chinese Miracle will come to an end. Those things may happen, but the effects will almost certainly be modest by the standards of the rest of the world. China’s economic expansion could slow to 8% or even 7%. That is hardly reason to believe that the country is on the road to economic ruin, particularly since it has quickly become the world’s second largest economy.
Pessimists cannot be moved off their point that increases in the price of key agricultural commodities and oil will eventually cause hyper-inflation in the People’s Republic. Hot money has driven up property prices in the major cities they say. China cannot help but face the bursting of a massive bubble. The results will be cataclysmic. But it would be imprudent to think that could ever happen. In a controlled economy like China’s the government has at least some measure of power over prices even if the cost is a substantially lower growth rate for a brief period.
The Shanghai Composite traded at nearly 3,500 in August 2009. It stands at 2,680 now. The threat to the economy on the mainland simply are not that bad.
Douglas A. McIntyre
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