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The Four Abnormalities of China’s Economy

China’s economy has posted impressive numbers of GDP growth year after year, but other economic indicators tell a different story.

Although Chinese college graduates have difficulty getting jobs these days, it is still quite shocking when the United Nations Development Program (UNDP) says in its research report published on June 29, 2006, that China is "facing a challenge of growth with high unemployment." The United Nations is not the first one to have found the coexistence of high growth and high unemployment in China. Several years ago, there were already debates among Chinese economists on whether high growth is incompatible with high unemployment. Apparently, such a phenomenon has already been recognized in mainland China.

In economic theory, it is believed that high economic growth accompanies high employment. Would China be an exceptional case that defies the conventional economic norm? Comparing China with the three other BRIC (Brazil, Russia, India, and China) countries, the economic growth in Brazil, Russia, and India has brought about a high growth of job opportunities. Among the BRICs, two are great powerhouses of natural resources, and the other two are countries with large populations. The economic boom in the four countries has not only given birth to a three-year-long bullish global commodities market, but has also become the major reason for the highest world economic performance in the past 10 years.

The comparison has also revealed three additional phenomena inconsistent with economic theory: divergence between the economic growth and the performance of the stock market, coexistence of low inflation and high housing prices, and coexistence of an overheated economy and extremely low interest rates.

Coexistence of High Growth and High Unemployment

It is no secret that China’s job opportunity growth rate is lower than its economic growth rate. We can just look at the annual college graduate’s job market. The State Statistic Bureau once estimated that in the 1980s every percent of GDP growth brought about 2.4 million jobs, while in the 1990s the number shrank to 0.70 million. The key to the problem lies in the large increase in the number of college graduates, which was 1.15 million in 2001, 1.45 million in 2002, 2.12 million in 2003, 2.80 million in 2004, and 3.38 million in 2005. This series of figures depicts a pattern: Ever since 2000, the faster the economy has grown the more difficult it has been for a college graduate to find a job. According to the UNDP report, "trade has deteriorated the inequalities. Behind the successful stories in East Asia, there lie the challenges of ‘jobless growth.’ Young people and women are experiencing ‘jobless growth,’ with the growth of the labor force being much faster than the growth of job opportunities." The Asia Pacific Human Development Report 2006 stated that in the 1990s China’s economy had been on a growth track as high as 10.1 percent boosted by a continuous climb in exports, while during the same period the growth rate of job opportunities was only 1.1 percent.{mospagebreak}

Economic Growth Has Not Been Reflected in the Stock Market

The stock market has always been called the barometer of macroeconomics. However, this barometer often does not work in China. Though there has been a noticeable increase in the price of stocks since last December, it is only minor compared with the huge downslide in the past four years. Therefore, the increase is only regarded as a technical bounce at best. It is, in fact, nothing to be proud of compared with the other three countries (Brazil, Russia, and India).

In the past four years, the stock markets in all of the BRIC countries, with the exception of China, had excellent returns. Last year alone, the Russian stock market increased by 100 percent, and Brazil’s and India’s by 50 percent. So far this year, the Brazilian and Russian stock markets have recorded another 10 percent increase, and India about an 8 percent increase. What is worth noticing is that the Indian stock market expanded three-fold in the past three years. Though it had a little correction recently, it still hovers near its all-time high. In June 2003, the SENSEX in Bombay was at about 3,000 points; it was over 10,000 points on February 17, 2006, rising at extraordinary speed.

Coexistence of High Growth and Low Inflation

In general, economic growth will be coupled with inflation-it is a commonplace and reasonable occurrence. However, China has been enjoying high growth in the past decades, yet it has no serious inflation. On the contrary, in the past two years, it has had some deflation, a phenomenon that is hard for economists to explain.

In comparison, the other three BRIC countries have all experienced inflation to different degrees. In June, the inflation for India was 5.24 percent, Russia 6.2 percent, and Brazil 8 percent—all far exceeding China. Mild inflation is one of the signs of a booming economy, and not something problematic. Strangely, China does not have inflation, but deflation, even with years of high growth. What’s more, the low inflation in China occurred when the real estate prices were shooting up. Is there a relationship?

Coexistence of Long-Lasting Overheating Economy and Very Low Interest Rate

This is something worthy of our attention. Many Chinese official media have talked about how the Chinese economy has been overheating for quite some time, yet its real interest rate is nearly zero. Generally speaking, this very low interest rate policy is only used as a tool to stimulate the economy when it sags, for example, Japan’s zero interest rate following the bursting of the bubble. However, when the economy is overheating or inflation is in sight, in order to keep the economy healthy, the interest rate should not be this low any longer. For example, the Fed in the United States increases the interest rate to curb the economy when it is overheating. For China to insist on a low interest rate while its economy is overheating sounds like a self-defeating paradox.{mospagebreak}

These are a few examples of how China’s economy differs from others. Since traditional economic theory cannot explain the phenomena, we temporarily use the term "the abnormalities of China’s economy."

Translated by CHINASCOPE from