China's economic plan: Blame U.S.

Well, maybe. On the same day, the World Bank issued its own report on the economies of Asia and reached very different conclusions. A slowdown in the U.S. economy to even zero growth from the current rate of 2.6% would cut only a single percentage point off growth in Asia, the World Bank says.

In contrast, working from the Chinese estimates of how much a fall in U.S. growth would hurt Chinese exports and from estimates that attribute about one-third of China's economic growth to exports, I would estimate a drop of 2 to 4 percentage points in China's official growth rate if the U.S. economic growth rate declines by a percentage point.

China's unreliable statistics

In 2008, according to the World Bank, China's economy will grow by 10.8%. That's not significantly different from the 11.3% growth projected for 2007.

• Discuss with Jim Jubak: What's happening with China's economy?

China's official economic numbers are notoriously unreliable. Just this summer, for example, the Asian Development Bank reported that China's economy is a tad smaller than previously reported -- roughly 40% smaller. And that the number of Chinese living on less than $1 a day is about 300 million, roughly three times above previous estimates.

The reason for the revisions? Chinese officials finally got around to providing accurate price data that the bank needed to calculate how big a boost lower prices in China have given to Chinese living standards. Thanks to inflation, the increase in purchasing power wasn't nearly as large as had been believed.

The World Bank will publish its own revised economic estimates for China later this year, and they're expected to be close to the Asian Development Bank figures.

But in the argument over slowing economic growth in 2008, the bureaucrats from Beijing have a big edge. In China's still remarkably centralized economy, Beijing can pretty much set reported growth wherever it wants. (Real and reported growth are sometimes at wildly differing levels.)

I think investors should take Beijing's pessimism as an indicator of its goal for reported growth after the 2008 Olympics. And I'd regard the Ministry of Commerce's report as part of a political effort to sell the necessary monetary and market pain to the Chinese people. Supplying better price data to the Asian Development Bank and the World Bank may be part of the political preparation, too. Telling the Chinese people that their country is poorer than they thought might be a good way to sell hard work and austerity.

The ultimate economic and political goal would be a post-Olympics reset for growth and inflation. Years of double-digit economic growth rates create a burden that gets ever harder to carry. If the country did 11.5% last year, then 10.5% growth becomes a disappointment. If inflation is running at an annual rate of 6.5% in October, then consumers, workers and CEOs start to expect 7% inflation in January.

Can Beijing assert control?

A break in the string of years with double-digit growth would also give China a chance to reset soaring commodity prices. Everyone who produces, trades or invests in iron, copper, nickel, tin, zinc or oil has an eye out for the moment when demand from China starts to flag. That, the commodity markets believe, would mark a huge turning point for commodity prices. That belief would be self-fulfilling, since selling by commodity traders on signs that China was slowing would itself drive down the price of commodities.

None of this means China's growth will fall when or at the speed that the Ministry of Commerce report suggests.

Beijing may not be able to control inflation or growth. Thousands of government officials, from village to province to the national level, have a big financial stake in seeing rampant speculation and inflationary monetary growth continue. The Chinese Communist Party may finally shy away from inflicting any real pain on a country where its hold on power rests on its ability to deliver higher incomes and more material goods. And the U.S. could foul up the whole scenario by refusing to drop into a deep slowdown or recession.

Continued: Developments on a past column

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