China's Growth an Accounting Miracle
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We've been learning how China has achieved its "miracle growth." The country showed positive GDP growth while its electricity consumption declined in the beginning of 2009 – creative accounting that makes Enron’s accountants appear as dilettantes. A paper published by John Makin at American Enterprise Institute explains it well:
"Once China had announced its 8 percent growth target, it began to disburse funds directed at a sharp increase in public works spending. It is important to understand that the disbursal of funds is recorded as GDP growth. So the government can easily control the pace of growth by the pace at which it releases funds that have already been allocated in the stimulus package to the creation of higher production or growth numbers. Funds disbursed for fixed-asset investment by state-owned enterprises or provincial governments are counted as having been spent when they are disbursed. In fact, the funds go out to the state-owned enterprises and provincial governments and may be held until actual projects are identified and undertaken." (Emphasis is mine.)
But wait, it gets worse:
"...Ambitious planners count shipments [consumer products] as retail sales while end-use demand may be absent. In such cases, the “sales” are made to happen by virtually giving away the products that have already been produced and counted as GDP growth."
I am not convinced China will have inflation in the long-run. It appears that deflation is a more likely scenario as China is ridden with overcapacity – the country was geared for much higher global growth. I can, however, see inflation erupting in a very short timeframe as money has been thrown at the consumer/companies, and we are seeing this in the stock market and real estate. But in the long run, inflation appears an unlikely outcome: overcapacity and slower demand from the US and Europe will force Chinese producers to cut prices to increase utilization and stimulate demand. 
Lately, we've started hearing whispers of the Chinese renminbi contending for the status of the world’s reserve currency. On the surface it more or less makes sense. The US is struggling and Europe has structural problems. John Mauldin correctly put it, “EU was designed for prosperity not for adversity." It will be hard for the EU experiment to survive in the long run. But that's a topic for a different discussion.
China on the other hand is chugging along. I heard (though not confirmed) the Chinese stock market now has a greater market capitalization than Japan’s. Though the Chinese economy has the size of a global currency contender, it lacks one not-so-little element that the global economy will require for renminbi to become the world’s currency – political stability. We forget that China is still not a democracy. I am not sure what to call the political system of the People’s Republic of China but I don’t think it's the “people’s” nor is it a "republic." The rule of law is a nascent concept in China. Something is only legal if the government thinks it is legal.
And finally, I'm sure China doesn’t want the renminbi to be the world’s currency as it would drive up the value – a suicide for an export-based economy.
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By the way I can't help laughing every time someone wants Yuan to be global reserve currency. If someone wants your reserve depreciate 80% of purchasing power in 10 years, you got your Renminbi.
The author is missing one piece of information. By internationalizing the RMB, in the process China can gain a very effective tool to ensure decades of high growth the right to issue a widely circulated fiat currency. Imagine the virtuous circle - print RMB (figuratively), loan it to foreign nations with the proviso that the loan proceeds be used for Chinese products and projects to be built of Chinese companies. Repeat annually.
This is not only good for manufactured products, but also great for selling trillions of dollars in profitable systems that China can provide at substantial discounts compared to the offerings from the West or from Japan. Telecon, solar, wind, trains (high speed, not so high speed), dams, road, power generation, and all manner of infrastructure engineering.
The redbacks would be as much a fiat currency as the greenbacks ever were, which physical cost of creation is almost negligible. But as a tool it can now generate real wealth, as China exports tens of trillions of RMB in new business each year. Double digit growth for another 25 years is totally plausible. An initial tranche of say CNY 10 Trillion (Yuan) loaned would give a 10% - 15% permanent boost to the Chinese GDP.
60 years, ONE GOVERNMENT. And in the opinion of the author this is politically unstable??!! What mushroom are you smoking?
I think it is just this week that China announced the execution of 2 financial frauds, who bilked investors of about $125 million, as having serious deleterious effect on the society. You look at America, even after trillions of real money (to be paid by you and me and our kids and their kids and their kids for generations to come) is dumped down that bottomless pit created by the financial whizzes (or frauds, depending on how you look at it), NOBODY was even jailed, let along hung or shot. In fact this quarter the financials in America are announcing new an BIGGER bonuses to the same frauds that created the crisis in the first place.
THAT, is the biggest difference.
