(January 23, 2008) The global economy is not falling apart. New numbers out today show that China is still growing strongly. The report from the National Bureau of Statistics shows that China’s GDP grew at an 11.2% annual rate in the fourth quarter, which puts 2007 growth at 11.4% for the full year. That’s the highest rate since 1994, a year before China pegged its currency to the dollar.
Inflation is a problem, though. Consumer prices in December increased at a 6.5% annual rate, after 6.9% in November. That’s not good; in Chinese history, inflation is associated with social and political instability. The core of the problem is rising food, petrochemical, and energy prices, in no small part due to the sharp increase in grain and meat prices since the U.S. ramped up ethanol production. In response, China yesterday announced fertilizer price controls, adding fertilizer to the list of products, including grain, pork, milk, eggs gasoline and LNG, requiring administrative approval before prices can change.
Where there are price controls there will soon be shortages. Where there are shortages there are black markets, unhappy people, and often stagnant growth. Moving away from market prices is a step backward for the Chinese economy.
Ironically, U.S. pressure to re-value the Chinese currency have worsened the situation by attracting large sums of capital from speculators hoping to cash in on the rising RMB. Hot money inflows force the Bank of China to increase its purchases of foreign reserves, which further swells China’s money supply.
Last year China accounted for almost 35% of global growth, based on recent figures from the IMF. It is very important for everybody that the Chinese economy continues to grow in a sustainable way. I will have the opportunity to talk with Chinese leaders about this in a few weeks when I help open both the BOAO Forum and the Shenzhen Venture Capital and Private Equity Forum. I will let you know what I learn then.