Investors.com - Is China Really Growing That Fast?

Investors.com - Is China Really Growing That Fast?: "

Is China Really Growing That Fast?

Posted 01/11/2010 07:36 PM ET

Competitiveness: A spate of new reports show China leapfrogging other nations on its way to economic superpower status. Time to concede the global economic lead to the world's most populous nation? Hardly.

The news these days is filled with Chinese triumphalism. The indispensable Drudge Report did us all a favor by collecting a number of very recent headlines about China's soaring, seemingly unstoppable, economy. Among them:

• 'China Ends U.S.'s Reign as Largest Auto Market' (Bloomberg).

• 'China Becomes Biggest Exporter, Edging Out Germany' (Associated Press).

• 'China Banks Eclipse U.S. Rivals' (Financial Times of London).

To top it off, Nobel Prize-winning economist Robert Fogel predicted early in the new year that China's economy alone would hit $123 trillion in 2040, three times what the entire world produced in 2000 and more than twice the world's current output. Per-capita income will be $85,000, more than triple that in the European Union.

Such news is sure to spark a new round of hand-wringing in the U.S. It's only in a matter of time, they will tell us, that China will be top dog — and the U.S. just an economic pup by comparison.

With reported average GDP growth of 10% (even last year, during a global financial crisis, China reportedly grew at an 8% pace and is predicted to grow 9.5% this year), that's a real possibility. Ten percent growth leads to a doubling of the economy in just seven years. At 2.5%, where the U.S. is now, it takes about 29 years.

So China's total GDP of $5 trillion will soon overtake our $14 trillion, right? Not so fast.

First, let's ask the question that economists often ask but is all but ignored in the media: Can China's data be trusted? Many economists believe the answer is no. In fact, no one knows for sure what China's GDP is. The communist government simply announces it — there is virtually no transparency.

These problems go way back. In 1992, China finally stopped using economic accounting methods it learned from the USSR — methods that led to consistent overestimates of Chinese growth.

Yet problems remained. In a 2001 study, economist Thomas Rawski of the University of Pittsburgh declared that 'recent growth claims defy economic logic and clash with a broad array of credible information from Chinese resources ...'

Last year, Derek Scissors, a fellow at the Heritage Foundation, likewise critiqued China's economic record-keeping — and asserted China's current economic model of high growth based on forced lending by the government is unsustainable.

'In the past, the People's Bank would report loan growth in the 15% range, supporting better-than-10% GDP growth,' he wrote. Last year, China's lending surged by a third, thanks to its own $590 billion 'stimulus' package. But growth was just 8%.

Sound familiar? In the late 1980s, Japan was set to own the world based on its vast expansion of lending and exports. Some see a similar Chinese bubble in the making — one that would dwarf the financial tsunami that hit Western economies after 2007.

This is not to say China's economy is not growing. It is. It's just not growing as fast as its officials say.

But the real question is — how well do individuals do in China in terms of output? Even using questionable current data and despite decades of rapid growth, the results aren't so impressive.

Per-capita GDP in China isn't even $2,500 a year, in real dollars (see chart). In the U.S., it's $42,000 a year. In short, it'll be decades, if ever, before China closes that gap.

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