The China growth miracle has resumed its vertical trajectory. We know this because the Chinese government says it's so. And, of course, governments never massage economic numbers for public consumption, right?
If you believe the data, China's GDP has tripled since 2000, with annual growth rates ranging from 8% to 13% over that time frame.
While we can't be entirely sure about the numbers, we are sure that China produced while America consumed, and that while China saved, America borrowed. This is the formula that made the world go round until September 2008, when the wheels came off the worldwide financial system.
In the first quarter of 2009, China's GDP fell to an annualized 6.1%, the lowest since 1999. In an attempt to reboot the economy, the Chinese government unleashed a colossal $586 billion stimulus package, equal to 14% of GDP.
That stimulus appeared to have the desired effect, with Chinese GDP growth ramping back up to 10.7% in the fourth quarter, allowing the country to exit 2009 with a reported 8.7% growth rate.
China's Reported Recovery
There is no disputing that China has achieved tremendous economic progress over the last four decades. China's GDP in 1970 was $92 billion. Today, it is $4.9 trillion, a 5,326% increase in 29 years. They now command the third largest economy in the world and will surpass Japan as the second largest economy on the planet within the next two years. Remarkable for a totalitarian regime operating a command-and-control economy that, among other actions, can order banks to make loans without consideration for whether the loan has a chance of being repaid.
Pundits and the mainstream media have bought the China miracle hook, line, and sinker. They speak of China in the same revered tones they worshipped Japan in 1988. Back then, the "experts" concluded Japan was unstoppable. Japan's miracle economy proceeded to implode under the weight of bad debt and malinvestment, leading to a 20-year downturn that continues today.
Of course, history has shown us that centrally planned economies appear to be strong from a distance but eventually rot from within. The malinvestment created by the economic cronyism inherent in such a system is almost certain to lead to collapse (e.g., Soviet Union circa 1989, United States on or about 2015).
Even so, the figures reported by China are remarkable, with capital investments soaring over the last decade. The real question is, were these investments made wisely or have billions been squandered on worthless plants, equipment, and infrastructure? If the latter, then the excessive overcapacity will likely prove the pin that pops the Chinese bubble.General Economic and Financial Indicators, 2001-2008(All figures are in billions of RMB or percent unless otherwise indicated)Main indicators
To answer the question on overcapacity, it is important to first understand the nature of the China miracle. It is quite simple.
The Chinese Miracle
The average Chinese factory worker earns $3,544 per year. In comparison, the average U.S. production worker makes $32,320. The Chinese have tied their currency to the U.S. dollar, so as the dollar has fallen, Chinese goods have become cheaper to the rest of the world.
The Chinese have leveraged their cost advantages to aggressively compete for market share, in quick order becoming the manufacturer for the world. From just $250 billion in 2000, Chinese exports have grown to over $1.5 trillion today.
One consequence of this global manufacturing shift has been that China has piled up huge trade surpluses. The trade surplus with the U.S. alone has exceeded $200 billion per year over the last five years.