For a communist country, China certainly understands how to use capitalism to grow its economy. Last week, the National Bureau of Statistics (NBS) indicated that China's gross domestic product for 2005 increased 9.9% to $2.23 trillion.
Interestingly enough, China's economy may be larger than Britain's. That would make it the fourth-largest in the world.
But China's growth numbers must be read with skepticism. After all, it is common for the NBS to revise numbers. (Even U.S. figures are subject to revision.)
Yet few would argue that China's economy is growing at a rapid clip. What's more, inflation has been fairly muted -- basically at 2% or so. Actually, there is some concern about deflation, especially as China continues to produce large amounts of basic commodities. To the extent that these prospective price decreases are passed on to the consumer, I'd estimate the impact will be relatively muted and the risk of systemic deflation (a much larger concern) will be relatively nil.
Of course, a big driver of economic growth in China is demand from the mighty U.S. consumer. Ironically, this buying binge is being financed by China, as indicated by the massive trade deficits. In fact, this year it looks as though China will have more reserves than any other country in the world (in excess of $1 trillion).
One thing to keep an eye on is the extent to which this applies pressure to change the country's peg on the yuan and/or let it float a bit more freely. This is something that can happen very quickly, and I suspect we'll see more trade tensions emerge this year. For that matter, with the huge amounts of capital in the Chinese coffers, I think we will see more acquisitions of U.S. assets -- which would further fuel the fire.
True, if the U.S. consumer slows down, China would try to stimulate domestic demand. After all, the national savings rate is a staggering 40%. However, there may be cultural barriers in encouraging more consumer spending.
So, if the U.S. consumer slows down, it's likely to dampen growth in China and many other economies. What's more, the Chinese economy is built for growth. With the massive population -- one that is aging -- the government is focused on growth, not fears of inflation. And over the past 15 years, the growth for China has been at double-digit clips -- which explains why the economy is one of the biggest in the world.
The risk, I would say, is that given the Chinese economy has been in growth mode for so long, a decline could pose the risk of a much bigger decline. That is, as consumers and businesses cut back, it may snowball more and result in a bigger contraction. Add the huge currency reserves and possible trade tensions, and this is something that might happen. But I think the Chinese government will try to find ways to keep the growth moving, particularly given the country's burgeoning service sector.
Fool contributor Tom Taulli does not own shares mentioned in this article, not unrelated to the fact that no shares are mentioned.