South-Western College Publishing - Economics  
Long-Term Affects of Chinese Growth
Subject Economic Growth
Topic Productivity and Growth
Key Words Economic Growth, Productivity, Standard of Living, and Global Growth
News Story

Industrial production in China soared 17.2 percent in October since the same month only one year ago. This surge in productivity serves to highlight and explain the rapid economic growth of the Chinese economy in recent months. "The Chinese economy is absolutely red hot," said Dong Tao, chief regional economist at Credit Suisse First Boston. "This is great news for the world economy and people selling machinery or iron ore to China." Riding this wave of productivity the Chinese economy grew at 8.5 percent in the first nine months of the year.

The rapid growth also raises a caveat of the dangers that may accompany an economy that is growing too fast. "When China accelerates, the world follows," Mr. Tao said. "When China slows down, the world will hurt. China is no longer just another emerging-market economy."

"Asia's economy, being one of the major sources of global growth, is experiencing intraregional trade, which is reflecting the domestic demand that is strongly accelerating and improving in various economies in Asia," said Jan-Claude Trichet, president of the European Central Bank. He added that the growth in China would speed up a global economic recovery.

Mr. Tao, on the other hand, warns that the rapid pace of new investment in China is likely to undermine the economy by providing too much productive capacity and possibly producing deflation and recession in the longer run. "Money has been flowing around so fast that we are eventually looking at an investment fiasco," Mr. Tao said. "Huge amounts of capacity will come online in about five years, prompting a deflationary situation."

As Asia's second largest economy behind Japan, China is contributing significantly to Asian economic growth and an increased standard of living for the Chinese people. Asia, in turn, is widely credited for accelerating global growth faster than many economists and policy makers had expected. Given her size, however, China could just as well turn an apparent global recovery into a global recession should Mr. Tao's predictions on deflation become a reality.

Given the concerns related to an economy that is growing rapidly, there is still hope in the economic data. China still reports one of the lowest rates of inflation among Asian countries. Consumer prices are growing at only 1.1 percent from a year earlier. Should this trend continue the fears of recession may not be warranted.

(Updated January, 2004)


Discuss the government's role in promoting long term economic growth.

2. List and describe the determinants of productivity.
3. In the long-run, China's standard of living will depend on productivity. Discuss the long-run linkage between productivity and standard of living.
Source Thomas Crampton, "China's Bounding Economy Fuels Both Hope and Concern," The New York Times Online, November 11, 2003.

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