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If China’s amazing growth seems illusory, maybe it is

Not many people in Japan are convinced that China has truly become an economic giant even though Beijing has released impressive statistics on the country’s economic growth, accumulation of foreign exchange reserves, rising automobile sales and aggregate stock market value.

In the first quarter of this year, China’s real gross domestic product grew an impressive 11.9 percent over the same period the year before, showing amazing strength compared with the GDP growth of industrialized economies limping along in the global recession. However, 6.9 percentage points of the growth rate came about through investments from government and state-owned enterprises, and 6.2 percent was from personal consumption, which is the primary driving force in advanced nations. Exports contributed minus 1.2 percentage points.

One question is whether the investments will be effective in bringing about economic prosperity. For example:

In the farm village of Huaxi in Jiangsu province — about three hours’ drive from Shanghai where the World Expo has just opened — a 74-story, 228-meter-high skyscraper is nearing completion. At a cost of 2.5 billion yuan (about ¥34.5 billion), the building is the pride of the locals as the “15th-highest structure in the world.” Yet, the tower does not fit in with the economic environment. Although the village, one of the poorest in the province in the 1960s, has succeeded in fostering manufacturing industries (fiber and steel) and soybean curd-making, it is obvious that the skyscraper will never find enough tenants for all floors.

In another example, a high-speed railway line opened last December between the cities of Guangzhou in Guangdong province and Wuhan in Hubei province. The 1,069-km distance is served by trains running a maximum 350 kph, faster than any other train in the world. The problem is that it costs 490 yuan (about ¥6,700) to travel between the two cities in second class. That’s nearly one-third the average 1,500 yuan earned each month by farmers in the region.

These two projects illustrate the construction boom prevalent throughout China for railways, subways, expressways, airports, power stations, factories, buildings and condominiums. This has resulted in rising demand for raw materials like steel, cement, aluminum and chemical resins. Iron ore has risen to a record $100 to $110 a ton (the price at which Compania Vale do Rio Doce SA of Brazil sells to Nippon Steel Corp.). The price of Australian coal for power generation has gone up by nearly 40 percent this year to $98 per ton.

It is questionable whether the money invested in some of these projects will bring tangible, long-term economic benefits. That’s because Chinese leaders seem concerned mainly with creating employment opportunities for construction workers and increasing the demand for raw materials — not in how best to use newly built infrastructure to revitalize the national economy.

The Chinese leadership, headed by President Hu Jintao and Prime Minister Wen Jiabao, is so fearful of the consequences of a slowdown in economic growth that even after signs of recovery started appearing last fall, the government continued to increase government-led investments.

The late Den Xiaoping, who in 1978 initiated the policy of economic reform and economic opening, stated that economic growth will resolve all of the country’s problems by eradicating poverty and food shortages and by elevating China’s international status. The hidden message was that economic growth would solve the question of the legitimacy of Communist Party rule.

When the People’s Republic of China was born in 1949, the government was a coalition of Communists and various democratic forces. China gradually moved to a one-party system as Mao Zedong’s power increased in and after the 1950s. In the period of the Great Proletarian Cultural Revolution of the 1960s and ’70s, the Communist Party resorted to a reign of terror to suppress opposition.

China’s joining the World Trade Organization in 2001 led to high expectations for democratization among its people. Beijing has succeeded in turning citizens’ attention from politics to economics by accelerating increases in income and living standards.

Under continued Communist Party rule, the 73 million card-carrying members have been assured of stable livelihoods. Although their wages are not surprisingly high, they are entitled to perks like houses, automobiles, medical treatment, pensions and opportunities to send their offspring overseas for study.

Competition for powerful positions within the Communist Party is complicating the economic policy of China. Leaders of local party chapters all aspire to be elected to high positions in the party’s Central Committee and Politburo at the National Congress of the Communist Party of China every five years. The best way to prove their competence is to achieve high economic growth in their respective regions.

To that end, they seek to invest more money toward a wide range of projects. With the next Congress scheduled in 2012, they are prone to engage in excessive investment competition.

The financial burden of China’s 4 trillion yuan stimulus package is to be shared equally (one-third) among the central government, local governments and state-owned enterprises. Local officials, however, earmark incremental budgets of their own. The wasteful infrastructure and buildings that have emerged in their regions are the result of competition to seek promotion within the party.

Despite such wasteful spending, China may not have to worry about a fiscal meltdown, because its cumulative deficits amount to only 22 percent of GDP. The fact that the Communist Party’s interest comes first, not the state’s general interest, is becoming more clear. Therefore, the view of China as an economic giant with a viable growth strategy is an illusion.

This is an abridged translation of an article from the May issue of Sentaku, a monthly magazine covering Japanese political, social and economic scenes.