Beijing is going backwards in pursuit of growth
The news last Friday that China's economy slowed to its lowest growth rate in three years caused anxiety around the world.
With much of Europe in recession, and the United States struggling to escape its own downturn, a whole legion of commentators promptly warned that the only remaining engine of global growth is now in danger of stalling.
At first glance, it looks as if people were right to be worried. China's gross domestic product in the second quarter of the year was up by just 7.6 per cent compared with the same three-month period last year.
As the first chart shows, barring the short-lived slowdown in the depths of the financial crisis, that's China's lowest rate of growth in the last 10 years.
What's more, the pessimists were able to point to a range of supplementary data indicating the slowdown may be worse than the official figures imply.
As a result, some analysts concluded that China's true growth rate in the second quarter was below 7 per cent and that the economy is irreversibly crunching down to a painfully hard landing.
Scratch a little deeper, however, and it begins to look as if China's growth trajectory has already bottomed out and is now climbing once again.
Anxious to maintain a rapid pace of activity through the approaching leadership transition, senior officials have already given orders to step on the gas by ramping up investment.
Speaking last week, Premier Wen Jiabao declared: 'Currently, what is important is to pursue a reasonable growth of investment.' And on Friday, the People's Bank of China reinforced the message, ordering the country's banking system to step up lending so as to support growth.
There are clear signs this stimulative policy is already having an effect. Banks extended 920 billion yuan (HK$1.12 billion) in new loans last month, up 16 per cent from May's figure. At the same time, government investment in infrastructure projects has rebounded smartly after a period of decline, while investment by state-owned companies has also picked up (see the second chart).
As a result, seen in quarter-on-quarter terms, China's economy accelerated, not slowed, between March and June, with the growth rate rising to 1.8 per cent from 1.6 per cent in the first quarter.
The trend is set to continue. On Friday, the Asian Development Bank forecast that China's annual growth rate will come in at 8.2 per cent this year - well in excess of the 7.5 per cent target Beijing announced in March - and accelerate to 8.5 per cent in 2013.
That might reassure the commentators who were lamenting China's slowdown on Friday. Unfortunately, however, there is a problem: by pursuing short-term gain, it is likely Beijing will only worsen China's long-term pain.
In choosing to support growth by stepping up investment, China's leaders are exacerbating the distortions within the country's domestic economy.
Last year, investment made up almost half of China's GDP, while private consumption was just 35 per cent. Those proportions are the opposite of what economists believe would be healthy and sustainable for an economy at China's stage of development. Boosting investment now will only make the necessary future adjustment more difficult.
Worse, the government-mandated increase in investment will be driven overwhelmingly by the state sector, principally by local governments and state-owned companies. Meanwhile the relatively productive private sector will remain starved of capital.
That means more grand infrastructure projects of dubious merit and yet more new plants in industries already suffering from excess capacity.
As a result, it is likely many of the new investments will fail ever to generate a decent economic return, which will heighten the danger of a future debt crisis and delay much-needed financial and industrial reforms.
That, rather than the modest slowdown in China's headline second-quarter growth rate, is what people should really be worrying about.