China’s Overheating Economy “Smoothes” Things Out

by Lillian Sun

China is one the world’s largest manufactures and currently holds an important position within the global market. Through the past decade, China’s immense double digit GDP growth has caused it to become the role model for all developing countries. In most classes that I have taken on the development of China and the Chinese economy, China’s significant growth rates and profitability have always been emphasized. However, an article recently published in the New York Times offers an explanation which may change your opinion of the Chinese economy and of China’s reports on its growth rate.

Despite repeated denials from Chinese government economists, a variety of Western economic studies have suggested that the Chinese government “smoothes” its economic data — exaggerating performance in weak quarters and understating growth in during booms so as to present an image of stability. [link]

The practice of “smoothing” suggests that China may not have always experienced such stable growth, which the rest of the world believes. Instead, this article suggests that the Chinese manipulates their growth data to portray stability which they may not actually have. I am not saying that all of the data which China reports are therefore absolutely inaccurate, but this article offers a degree of skepticism of which investors should be aware.

Stephen Green, an economist in the Shanghai office of Standard Chartered Bank, said he suspected that the true Chinese economic growth rate in the first quarter might have slowed a little more than the government acknowledged.

The Chinese government is known to be notorious for regulating the flow of information to the rest of the world. The amount of problems which the Chinese economy is still punctured with, such as their weak banking system, along with their highly unregulated stock market, really puts China in a risky position within the global community unless certain institutions are implemented to address these problems. These problematic issues suggest that it is very likely that “smoothing” does actually take place within the Chinese economy, and I am sure that in the long run, this can become a serious issue if inaccurate data is reported often.

In dealing with an overheating economy and the scares of inflation, China is also hurting from the current global economic downturn. Those who invest in China must realize that a profitable economy or market does not last, that is just how the business cycle works. However, as a socialist country with an authoritarian regime controlling the correct and the flow of information, the rest of the world must be wary of the manipulated data and reports which the Chinese government may be feeding the public.

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2 comments for “China’s Overheating Economy “Smoothes” Things Out

  1. David Wong
    April 26, 2008 at 3:26 am

    I think this is rather old news. They’ve been saying this about China (along with an “overheated” economy and potential threats to slow down growth) for at least the past 10 years now. Unless there is direct data proving the occurance of such things , I think it is little more than speculation– particularly in lieu of a rather negative attitude towards China’s political system. Japan experienced near constant economic growth between the late 1940’s and 1980’s: their bureaucracies and financial institutions were fairly insulated and untransparent as well. That is not to say that China is in quite the same situation as China but I think solid proof is needed to prove this claim.

  2. Calvin
    July 4, 2008 at 6:36 pm

    I agree with David that we should take into account the negative attitude towards China when we read this blogpost. We need to think about exactly who the reporters are, who their sources are, where their source of funding comes from and other factors. This is not to be conspiracy theorist but rather to gain an accurate picture of the situation. To be sure, China poses a significant threat to the US. Some may dismiss this statement citing that the US is economically and militarily stronger by a great multitude. However, there are many ways of gaining power in a world of multiple entities. First of all, military strength in recent years have shown to decrease foreign support for the US due to the increasingly popular view that the US is becoming highly unilateral and its image has become that of a world bully rather than policeman. Also, China does not care with whom they trade. This will reduce the effectiveness of American led sanctions as these “condemned” nations still have China to trade with and thus not really be isolated.

    As to the statement that “the Chinese government is known to be notorious for regulating the flow of information to the rest of the world,” we also must look into the background of this behaviour. In 2002, when North Korea admitted to kidnapping 13 Japanese citizens in the 1980s (this was in bid to better relations with Japan), they faced a backlash from the Japanese and the world body led by the United Kingdom to condemn North Korea. Japan moved to accuse North Korea of understating the number of individuals actually kidnapped. Other nations also started accusing North Korea of hiding other information. Although the action was certainly wrong, we should look at it in perspective. It did happen almost 30 years ago and yes families are bitter but considering that North Korea’s action was an act of opening up in hope for better relations, shouldn’t we act to help promote this transparency? And really act to minimize the punishment? Has the start of World War 2 due to the harsh punishments of World War 1 not taught us anything?

    In a class I took in spring 08, a video of a reporter going into North Korea to report on the situation was played to us. This video was possibly the epitome of both ignorance and arrogance not just about the situation in North Korea but also culturally. Everything the guide told him not to do was seen not as advice but an attempt to block him from information. He did not care that the people he interviewed were genuinely uncomfortable talking to him and such. This particular reporter basically went in with his own interpretation of the situation and not with the real intent to discover anything new but to look for anything that would remotely prove his point.

    And we wonder why China is refusing to allow reporters into Tibet and is intent on regulating information.

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