Courtesy of Vitaliy N. Katsenelson

We look at the Chinese economy and its reported 7.9 percent growth and though we won’t admit it to ourselves, it makes us feel inadequate.

The Chinese have gotten the economy thing figured out:

  • Large population migration from farms into cities boosts productivity
  • Abundance of cheap labor gives it a comparative cost advantage
  • Through currency controls its currency — the renminbi — is kept artificially low against the dollar and euro, making its cheap goods even cheaper
  • Controlled free-market economy (an oxymoron, if you ask me) allows the government to do whatever it wishes on the fly — it decides that banks “have to” lend, banks only ask how much.

Its economy can grow through good and bad times. In fact, there are no bad times for China. You’d think that an export-based economy would at least take a pause when its exports to the developed world drop off the cliff.

No, not China, which spit out growth numbers last week that are the envy of the West even in the West’s best times. The country showed robust GDP growth while electricity consumption declined. The laws of economics appear to be suspended for the Chinese — but they are not.

They just have “better” accountants — ones that would make Enron’s bean counters seem like dilettantes. A paper published by John Makin at American Enterprise Institute explains very well how Chinese got their GDP growth: “Once China had announced its 8 percent growth target, it began to disburse funds directed at a sharp increase in public-works spending. It is important to understand that the disbursal of funds is recorded as GDP growth,” Makinwrote. “So the government can easily control the pace of growth by the pace at which it releases funds that have already been allocated in the stimulus package to the creation of higher production or growth numbers.”

Nice work, huh? “Funds disbursed for fixed-asset investment by state-owned enterprises or provincial governments are counted as having been spent when they are disbursed,” Makin noted.

So those of you who feel inadequate — stop. If the US were to compute our GDP based on Chinese methodology Google would be our middle name.Why does Chinese GDP growth matter? Well, a significant portion of stock appreciation going into 2008 was driven by deep cyclical companies that make “stuff,” i.e. energy, materials and industrial companies like Caterpillar, ExxonMobil and Arcelor Mittal.

In the beginning it was the US economy coming…
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