China experienced deflation, an economic phenomenon distinguished by constant falling prices because of excessive supply, from 1998 to 2002 (Figure 11.1). Deflation is generally accompanied by zero or negative growth, but in China it was accompanied by average annual growth of 7.8 percent, then the fastest in the world (Figure 11.2). Such growth is supposed to be accompanied by higher energy consumption, because industrial production, transportation, and other aspects of economic activities consume energy. But in China it was declining from 1997 to 1999 (Figure 11.3). In many other countries energy consumption is positively correlated with economic growth.

Is China's growth real?

Around 2000 a number of foreign scholars doubted the truth of China's economic growth. According to their research, 2–3 percent growth would have been extremely remarkable, and China's official statistics, they implied, were simply too good to be true.

Were they correct about China's statistics? To answer requires first understanding the causes of deflation. Is it true, as many foreign scholars believe, that deflation is inevitably accompanied by economic stagnation? No.