China's 8.9% Growth? No Way Gordon G. Chang, 10.23.09, 12:01 AM ET On Oct. 22, Beijing announced that gross domestic product grew by 8.9% in the third quarter of 2009 compared with the corresponding period last year. The National Bureau of Statistics also reported that growth for the first three quarters was up 7.7%. The 8.9% figure confirmed the economy's upward trend. Growth, according to official statistics, tumbled to 6.1% in the first quarter, well off the double-digit figures seen in 2007 and the first half of last year. The economy picked up during this year's second quarter, when it expanded 7.9%. Now it is clear that China will attain for 2009 at least the 8% target that Premier Wen Jiabao set in January. China's leadership is evidently satisfied. As the State Council noted on Wednesday, "The positive trend of recovery has been consolidated." How could it not have been? Since last November, Beijing has spent perhaps as much as $900 billion--from its own funds as well as those of the larger state banks--to jump start its $4.3 trillion economy. No government can disburse that amount of cash without creating some economic activity. Yet China's economy, for all the stimulus it has received in 11 months, is underperforming. As an initial matter, reported third-quarter growth was slightly below the 9.1% consensus estimate of economists. More important, it is unlikely that 3Q expansion was anywhere near the claimed 8.9%. This claim is not consistent with other statistics. The economy, for example, is still dependent on exports: Before the massive government spending, about 38% of GDP was attributable to sales abroad. Yet exports tumbled 23.0% in July, 23.4% in August and 15.2% in September. Another important indication of slowing activity was the third-quarter drop in imports. They fell 14.9% in the first month of the quarter,17.0% in the second and 3.5% in the last. And what took up the slack? The other two legs of the economy are, of course, investment and consumption. On consumption, retail sales, a crucial indicator of activity at China's shops, zoomed up during the last quarter, increasing by no less than 15.2% in any of the three months of the period. There are fundamental problems with this key statistic, however. First, Beijing includes government purchases in the number as well as goods shipped from factories but not yet sold to consumers. Because the retail sales figures include these extraneous items, it is no wonder they do not correlate with statistics showing consumer price declines in each month of the July-September period--down 1.8%, 1.2% and 0.8%--plus increases in M2 in all three months. In September this broad measure of money in circulation jumped 29.3% after increasing 28.4% and 28.5% in the two prior months. Because these numbers are consistent with trends evident throughout the year, we have to ask a simple question: How can a country have robust consumer sales, nagging deflation and rapid monetary expansion all at the same time? One reason is that vast quantities of consumer goods are now sitting in warehouses. Beijing, in the 1990s, ordered factories to churn out goods in periods of low demand, and there are indications that officials are resorting to this tactic now. While optimistic analysts point to astounding car sales--up 70.5% in July, 94.7% in August and 83.6% in September--there are reports that central government officials have ordered state enterprises to buy fleets of vehicles and that these businesses are storing them in parking lots across the country. These stories are as yet unconfirmed, but they are consistent with statistics showing that gasoline sales have been flat this year--up only 6.4% in August, for instance, and sliding since then from all indications. So here's another question: At a time when economic activity is supposedly rising at a quick pace, how can large increases in passenger vehicle sales not be accompanied by corresponding surges in fuel usage? The answer is that Beijing's statisticians have gone back to their old tactic of making up figures to support the Politburo's predictions. The Chinese economy is probably growing due to state-led investment, but it cannot be doing so at the rates claimed. Wen Jiabao's stimulus plan is, above all, grossly inefficient. For all the money he is pouring into the economy, the country is getting a small return in economic output. That's why Premier Wen, despite the high growth numbers he's been reporting, consistently refuses to end his stimulus program. If his numbers were real, he would be worried about overheating. But he's apparently not. Of course, Premier Wen should be concerned about the imbalances and dislocations that are developing due to his spending. Global investors immediately sent equity markets lower after Beijing's announcement of third-quarter growth as they were spooked by, among other things, China's over-reliance on stimulus and the lack of private investment. They have every reason to be concerned. To create a "sugar high" of growth, China's central officials are busy renationalizing the economy, burdening the state banking system with loans that will go bad, undermining consumption by promoting investment, building excessive industrial capacity and engaging in mercantilist tactics to promote exports. The credit surge they're engineering will probably end up making Chinese enterprises less competitive, just as Japanese companies choked on too much money during their great bubble. The temporary advances in prices for Chinese stocks and property, the direct result of diverting Beijing's stimulus money into unproductive uses, are bound to scar the economy next year. In the meantime, however, Beijing will continue to boast about its economic management . As a National Bureau of Statistics spokesman said on Thursday, "We can say we have made obvious and remarkable achievements in our economic growth." Unfortunately, for the Chinese people and the rest of us, that is not true.