Of all the published economic data in the first half year, two eclipse all others in terms of importance. One is the Consumer Price Index (CPI) which in June rose 2.2 percent compared with the same period last year, the lowest rise seen over the last 29 months. The second is GDP, which in the second quarter grew 7.6 percent, the lowest growth rate in the last three years. So, why are the two numbers so important and why did they receive so much attention? Would these figures lead to deflation with a further fall of the CPI? Would they lead to an economic hard landing following increased GDP growth? It seems sensible for the central government to consider GDP growth of below 8 percent as normal. If the Chinese economy can stabilize at a regular growth rate of 7.6 percent for a long time, it will be easier for the Chinese economy to lift it to even higher levels.

First, though, it is necessary to realize what the 8 percent growth rate of GDP means. Is it a size of the number? If it relates to size, it doesn't work when the international economic situation undergoes great changes. If it includes quality as well as size, then we should take a look at whether the increase of GDP has changed in terms of quality, and examine the quality of GDP growth.

GDP growth of less than 8 percent is not worthy of panic, and by way of explanation, it is necessary to see the conditions behind the data comparisons, not just basic year-on-year comparisons.

So, what is it compared with? Of course, the data are compared year by year. Didn't the rapid growth of the Chinese economy in the last three years come from the unlimited expansion of excessive credit? In recent years, the expansion of bank credit exceeded 24 trillion yuan (US$ 3.77 trillion), eight times of the average annual growth from 1998-2002. With the rapid expansion of credit, GDP has grown rapidly in the last three years. , Such GDP growth is, however, unsustainable, growing as it did as a result of credit, and pushed higher still by the real estate bubble.

The central government has realized that this mode of GDP growth is unsustainable in the long term, so their adjustment plans included a targeted 7.5 percent GDP growth rate in the Government Work Report this year, along with 7 percent GDP in the "12th Five-Year Plan". In terms of 7.6 percent GDP growth in the second quarter, it was in line with expectations and predictions.

More importantly, we need to examine the background the China’s rapid GDP growth over the last three years? In fact, although the Chinese economy grew rapidly, even surpassing Japan, the numbers are merely cosmetic. We should also look at the quality of the growth. It can be said that the this growth was based on the excessive expansion of bank credit which was intended to enhance transportation and infrastructure, as well as ensure investment and monetary growth to stimulate real estate prices and encourage related industries.

As far as investments in transportation and infrastructure are concerned, they would lay a foundation for medium and long-term economic development. They are necessary, especially for economically deprived areas. As far as real estate is concerned, if promoting the housing market is beneficial to the public, then this must be a good thing. However, the fast expansion of the housing market became the tool with which to elevate capital prices, and subsequently a few people plundered the wealth of the majority.

In truth, the fast growth of GDP in recent years mainly depended on the fast development of the real estate sector, whereas the fast development of the real estate sector became a money-making machine for a few people. Therefore, housing prices rose and GDP increased, but the real estate bubble grew. If we took this as the target of comparison for our current data, it would lead to serious social problems as well as serious problems in the quality of GDP growth.

In addition, economic data in the second quarter didn't stray from the government's long-term economic predictions and planning, which is the government's expected target of macroeconomic policies. For the picture regarding economic development we don’t see too much variance, except in those places which were affected by the squeezing of the real estate bubble. In fact, squeezing the real estate bubble is likely to lead to stable, long term growth for China’s economy.

In short, the GDP for the second quarter is normal, and is the result of long-term economic planning by the central government. The central government should not sacrifice long-term economic development for short-term GDP growth. So the top priority is still to squeeze the real estate bubble firmly rather than rekindling the fire of the real estate sector to ensure economic growth.

(This article was first published in Chinese and translated by Lu Na.)

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