Is China’s Growth Real and Sustainable?

Since the reforms of 1978, China’s overall economic performance has been remarkable. The average annual GDP growth rate reached 9.4 percent from 1978 to 2002. However, in the last few years, China’s economic growth rate has been questioned. A deflation was evident at the end of 1997. In spite of the Chinese government’s many efforts, the deflation has continued. A deflation in an economy in general is accompanied by stagnation or slow GDP growth. However, China’s GDP growth rate reached 7.8 percent annually during the deflation period from 1998 to 2002, which was the fastest growth rate in the world. Moreover, energy consumption dropped in 1998 and 1999. The abnormality prompted some economists to question the reliability of China’s statistics. In this article, the author will analyze how it was possible for China to maintain high growth with reduction of energy consumption during the deflation period and suggest how China can absorb excess capacity and avoid deflation. The prospects for China’s long-term growth are also considered.