Page 71 - Monocle Quarterly Journal Vol 1 Issue 1 Q4

The Fallacy of Chinese Growth BY DAVID BUCKHAM
In the third quarter of 2015, Chinese authorities con rmed that growth had dipped below 7 percent – an announcement that had equity markets reacting sharply and negatively. Because China is a
signi cant driver of worldwide demand, particularly for commodity- based economies, economists explained that the decrease in demand would put the brakes on resources, justifying a greater than 50 percent decline in major commodity prices. Given, however, that a Chinese growth rate of 8 percent was previously considered to be miraculous, it seems rather surprising that a 1 percent reduction, would have such a negative leverage e ect. So what’s causing the reaction?
Many would argue that it’s the accuracy of the gures themselves. e argument goes: the Chinese stock markets are manipulated; from restrictions on selling, to extensive state-operated programs of forced- share acquisitions. Of the major world economies, China is the only economy within a political system that has remained utterly undemo- cratic; no further advanced than it was in the days of Tiananmen Square, with a state renowned for its economic intervention. So, it wouldn’t be unfounded to question the integrity of numbers quoted in the ‘o cial’ growth rate.
Opacity, however, is not a su ciently satisfying argument – nor are excessive bad-debt levels. e rate of 6.7 percent that China is now growing at seems extraordinarily robust in comparison to any other of the major world economies; US growth sits at 2 percent, and the entire Euro region has slipped down to 1.5 percent. So the question remains: why would a drop of 1 percent from a high of 8 percent, two years prior, lead to such a signi cant decline in demand?
e answer lies in the make-up of Chinese growth. Of the three main sources of demand: the state, consumers and business, China has an inordinate reliance on the state. In other major world economies, the state constitutes a third of total demand. In China, state demand constitutes over 60 percent of GDP.
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