While a great deal of emphasis is placed on statistical measures of economic growth and performance, the metrics should always be carefully assessed for accuracy and attempts by the government to unduly influence the outcomes for political reasons. As this essay is written in August 2015, the global economy is being stressed by faltering economic performance in China, a country which had been reporting “official” figures on annual growth rates of between 11% and 15% from 2005 through 2010. By the second quarter for 2015, the country’s official growth numbers indicated that the rate of year-over-year change in China’s GDP had plummeted to 7.0% and the fallout inside and outside the country was substantial: domestic consumption in China was weakening and likely to remain tepid for the foreseeable future, a situation that promised to play havoc with plans of foreign governments and companies that had been gearing up to sell goods and services to China; the ability of China to provide promised investments and low-cost loans to developing countries had become significantly impaired, which meant that anticipated growth in those countries would be stalled; demand for oil and other commodities in China was softening leading to a downturn in global commodity prices that was particularly harmful to developing countries who remained dependent on commodities for export revenues; and the volatility in Chinese securities markets, a drop in the Shanghai composite index of over 40% from April to August 2015, was triggering large volumes of selling activities in stock markets around the world that was increasing nervousness among consumers in other countries who were seeing the value of their retirement accounts punished by the choppiness of the Chinese economy.
The economic crisis in China laid bare to very specific concerns about the government’s policies and strategies. First, government leaders lack experience in managing an economic downturn and it is not clear that they will be able to making problematic short-term decisions simply to assuage nervousness among citizens and maintain a stable social order. The government tried to prop up prices of domestic stocks and maintain liquidity in domestic markets by transferring large amounts into the Chinese financial system, lowering interest rates, devaluing the currency and easing collateral requirements for obtaining loans to purchase stock; however, these initiatives ultimately failed to fend-off massive losses and anxiety. Second, while the process followed by the Federal Reserve Board in the US in setting monetary policies is relatively open and transparent, economists from outside of China have complained that “China is an unclear country for us, opaque” and “[w]e don’t know what to expect”. Finally, while many around the world were all too willing to accept and embrace the spectacular growth rates announced and celebrated by the Chinese government over the last decade, some economists began questioning whether the government was being candid about the seriousness and intensity of the de-escalation in growth. For example, rather than accepting the government’s 7.0% annual growth rate for the second quarter of 2015, as mentioned above, estimates by two private economic research firms pegged China’s progress at 4.3% and 3.7%, a sufficiently wide disparity to create even more uncertainty among government leaders, investors and other business people around the world.
China’s story is a cautionary tale to anyone relying on governmental statistics and assessments of projected future performance with respect to announced economic goals and objectives. Growth in China had been strong for so long, and certain of the underlying elements of the Chinese economy such as the large consumer market and rising middle class had seemed so compelling, that companies all around the world had built significant pieces of their product development, manufacturing and distribution strategies around China. These strategies not only assumed domestic growth in China but also Chinese support for other countries that would then presumably become more active and robust markets in their own right. As things turned out, companies in the US and elsewhere were forced to reassess not only their projected sales in China but also opportunities in African countries that would likely not have access to as much Chinese financial support as they had anticipated and would be coping with their own short-term economic crises as global commodities prices crashed.
Source: “As China Falters, Global Economy Must Adapt to New Reality”, The New York Times (August 27, 2015), B6.