Wednesday, July 22, 2009

Greed and 'good' GDP

Once again, greed has reared its ugly head after a hiatus of 18 months. Investors are tripping over themselves for a piece of the action in the world's second best performing stock market. Recently, about half a million new trading accounts are opened in China and the index went up to 3296, a level not seen since June 2008.

Many are optimistic that the country can attain the government-set goal of 8% gross domestic product (GDP) growth for the whole year. Due to the emphasis of the government on the GDP growth, officials are ignoring other aspects of development and environment protection. Funds and efforts have been mainly devoted to sectors that could have an immediate impact in boosting GDP growth.

Since China began to suffer a serious economic slowdown last year, there are lingering fears that massive unemployment will result in widespread social unrest. As such, Beijing gave up its five-year-old macro-economic control policy and set out on its political task of ensuring a 8% GDP growth for this year.

The quick recovery of GDP growth has aroused concern among some Chinese officials and economists that "GDP worship" is making a comeback. Retail investors should take statistics released by the China government with a huge pinch of salt. Some of the GDP figures are very 'good looking'. But they do not mean the growth of social wealth. On the contrary, they are instead achieved with a waste of social wealth. For example, a big bridge can be built and some GDP can be recorded. The bridge can be dismantled and rebuilt again. In this way, the GDP is multiplied twice but it is a huge waste of resources.

It can be expected that, once China successfully rides out the current crisis and resumes high-speed growth, the government may again have to impose macro-economic controls to correct the problems of imbalanced development and pollution. It seems that, unless China can discover a better mode of development, it will find itself difficult to break out of this vicious circle.

2 comments:

esther said...

Shanghai Composite fell 5% today on worries that banks will curb lending. An expert I met commented that the loans growth in 1H exceeded expectations as the Chinese lenders were rushing to lend to the better creditors. Otherwise the lenders may end up having to give loans to 2nd, 3rd, and worse rate coy that will eventually end up as bad loans in the banks' books. Therefore, it is likely that lending will slow and perhaps the bubble blowing in Chinese stocks and property will be more tame. As to the effect on GDP... hard to say. Managing the growth of a country is tough, especially so for a huge one like China. I think not to worry too much about how the country is being run...make your $ from it while you can. Having said that, China has run up so much YTD, it looks like some 'heartache' may be coming. Though some may counter that 3438 is still far away from Oct 07's peak of 5900 level...

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