Of course in terms of inflation, we’re not all that far off. But that growth figure, despite being slightly shy of last March’s 9.8%, is the stuff of wild fantasy for any UK government. The irony is that while in the west governments are busting a gut to boost growth, the Chinese authorities want to rein it in. They have just lowered their official annual growth target to 7% from 7.5%. But all the signs are that the country will continue to overshoot substantially for some time to come.
The Chinese consumer prices inflation rate is also now at a 32 month high of 5.4%, up form 4.9% in February, driven largely by a whopping 11.7% rise in the cost of food and agricultural products. That’s largely down to the inexorable forces of supply and demand, as the Chinese population is eating more food than the country can produce. But non-food inflation is also up 2.7% year on year, the fastest increase for a decade.
Official efforts to limit inflation have been, as one might expect from such an authoritarian regime, pretty heavy-handed. Direct price controls have been applied in the food sector and even in the property market, where restrictions have been placed on house purchases.
Interest rates have also been raised no fewer than four times since October, and the capital reserves held by Chinese banks have hit 20% as a result. What’s going on? The Chinese economy is awash with cash that has in essence been shipped over from the US Quantitative Easing programs, and the Chinese government is struggling to mop it all up. All those containers which return empty or full of waste to be recycled, having shipped out full of TV’s, iPads and smartphones, might as well be stuffed with hundred dollar bills as that is the effect the one way trade between China and the West is having.
The two big questions here of course are, what does this mean for China? And what does it mean for western economies? Starting with the Chinese question, the Chinese authorities long-term goal is to stimulate a much larger domestic market for consumer goods than currently exists. This would be much to their benefit, as it would make China far less reliant on exports and the health or otherwise of foreign markets like the US. They would become more the masters of their own economic destiny. Of course trying to do this whilst also keeping inflation in check (and maintaining the Chinese Communist Party’s iron grip on politics, too) is no easy task, as they are discovering.
What does it mean for the west? That’s harder to call, not least because it depends on how successful those efforts to stimulate local demand are. If things go according to plan, then a gradual unwinding of the vast imbalances between China and the US in particular will take place. As domestic demand increases, the Chinese will slowly unload the vast sums of dollar reserves and US debt that they hold, and the scales of global trade will obediently return to a more level position.
If things don’t go according to plan, well then the Jonahs are lining up with doom-laden predictions of disaster. They fear that China could become the bubble to end all economic bubbles, the bursting of which might lead to global economic woes which would make the travails of the last few years look like a storm in a teacup.
As usual what actually happens will probably lie somewhere between those two extremes, but for all our sakes let’s hope it’s more towards the glass-half-full end of the spectrum.