South-Westerns' Economic News Summaries
Chinese Economy Continues to Roar
Topic Productivity and Growth
Key Words

Exports, Investment Spending, and Economic Growth

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Reference ID: A137769848
News Story

In 2004, analysts and economists routinely predicted that the Chinese economy would slow down to about 8.5 percent growth in 2005. They were wrong. As 2005 rolls along, these analysts have been forced to adjust their forecasts upward. The latest figures indicate that the Chinese economy, the fastest-growing major economy in the world, shows no sign of slowing.

“This is much stronger growth than the market expected,” said Goldman Sacks economist Hong Liang. Mr. Liang expects the Chinese economy to grow 9.4 percent in 2005 and 9 percent in 2006.

What fuels this soaring growth? The Chinese are enjoying high levels of investment spending in infrastructure, increasing levels of domestic consumption, and continuing strong demand for Chinese exports. A report from the National Bureau of Statistics in Beijing noted that fixed-asset investment spending increased 26 percent, reaching a level of $700 billion in the first three quarters of 2005. Retail spending on consumer goods was up 13 percent to $563 billion. Add in a 31 percent increase in exports--to $564 billion--and it’s easy to see why the Chinese economy continues to grow at a blistering pace.

The current Chinese expansion is even outpacing Japan and South Korea’s decades-long expansion experienced in the 1990s. With no sign of slowing, many analysts are now suggesting that China is locked into a 9 percent growth rate for the near future. “It’s not going to change,” said Yiping Huang, an economist at Citigroup in Hong Kong. “At the moment, the government is trying to slow momentum a bit, but we’re not seeing slowing [in growth].” The consensus seems to be that the government will not take any significant measures to slow the growing economy, since officials are not concerned about inflation. “Will the government really hit the brakes? I doubt it,” said Credit Suisse First Boston economist Dong Tao. “Much of the investment is following the government instructions. It’s in second- and third-tier cities. This is what the government wants. They’ve regained solid control over inflation.”

Questions
1.

Discuss the concept of the multiplier as it relates to investment spending and growth in the economy. Why do you think that Chinese officials show little concern about inflation in the face of such fast growth?

2. If the marginal propensity to consume is .8, compute the simple investment multiplier.
3. Explain how to use this multiplier computed above to find the change in GDP resulting from a $10 billion dollar increase in investment spending.
Source David Barboza, “China’s Economy Surges 9.4% in 3rd Quarter”, The New York Times Online, October 21, 2005.
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