Bets on China – The Economist Sees (and Raises)

The Free Exchange blog at The Economist has accepted my bet, and very cleverly (the bastards!) they have added a second one.  For two years I have been arguing that a Chinese rebalancing will require much slower GDP growth rates than we currently think possible and, working backwards from annual consumption growth rates of 7-8%, I have argued that this implies that China’s real GDP growth rate will average not much more than 3% annually over the rest of the decade.

The key is how the transition takes place.  If there is a massive privatization program in which large amounts of wealth are transferred to the household sector, it will be possible for household consumption to grow much more quickly and so pull GDP growth behind it at higher rates than I assume.  But such a program of wealth transfer is, of course, not politically easy, and perhaps in recent events we have seen just how hard the debate over reform has become.  That is why I am not optimistic.

When I first proposed that annual average growth rates would probably not exceed 3%, the consensus for Chinese growth among local academic economists over this period was 8-9%.  Since then the consensus seems to have dropped to 5-7%, and especially in the past few months I regularly hear private comments from Chinese academics expressing concern even about this growth range.  Yesterday I received a very worried email from a professor at Zhejiang University who was especially concerned that the inability of the reformers to combat what in China are referred to as the “vested interests” might result in two years of strained growth and burgeoning debt followed by a crisis. I am not as knowledgeable about the politics of the transition as he is likely to be, but his focus on the debt is, I think, spot on.

But of course in spite of the growing lists of worries my prediction is still very much an outlier.  This worries me a little, of course, because one always assumes that conventional opinion must have some value, but I do remember that even the greatest skeptics about earlier investment-driven growth miracles seriously underestimated how difficult the adjustment was going to be. Even after the skeptics became concerned about Brazil’s growth miracle in 1980-81 no one, as far as I know, predicted negative growth for the decade.  And in Paul Krugman’s famous 1994 Foreign Affairs article, “The Myth of the Asian Miracle”, he warned – against all the hype of Japan‘s being the world’s largest economy before the end of the century – that Japan’s annual growth rate was unlikely to exceed 3% for any long period of time and that even by 2047 Japan would “probably” not overtake the US.

Probably?  In retrospect that “probably” seems almost perverse given nearly two decades of near-zero growth, but it does contain an important warning.  If even the very skeptical Paul Krugman wasn’t able to come close to predicting how bad things would get, why should we assume that we are a whole lot better today at understanding how difficult the adjustment process can be?

So of course as far as predictions go I am an outlier, with some trepidation, but in the end I suspect that if I am wildly wrong I am as likely to be wildly wrong in one direction as in the other.  As Rudiger Dornbush once said, “The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.”

So here are the two bets.

  1. The Economist says that at the then current dollar/RMB exchange rate China will be the world’s largest economy in 2018.  I disagree.
  2. I say that in real RMB China’s average annual growth rate for the rest of the decade will average 3.5% or less.  The Economist disagrees.  There is some question as to how to define “real”, but I think we will be able to agree on an acceptable GDP deflator.

What are we betting?  I was hoping I could get them to help promote some of the amazing young musicians coming out of Beijing if I won, but reasonably enough they can’t commit to the logistics and propose instead whisky or baiju.  I accept.

Having said all that, let me note how pleased I am by their knowledgeable reference to Birdstriking, Offset: Spectacles, and most of all to a band known almost exclusively among the cognoscenti, and one of my favorite bands in the world, the otherworldly, Ourself Besides Me, comprised of three talented women led by that painfully shy genius, Yang Fan. This has nothing substantial to do with our bet, of course, but I am delighted that such smart and knowledgeable people at The Economist can refer so confidently to such brilliant musicians.  At the very least it shows that the quality of Beijing music is no longer a secret.


P.S. The purpose of these bets is largely symbolic.  I am not trying to earn additional income by making book on growth prospects, so please my dear readers do not offer to make additional bets with me.  I simply don’t have the ability or interest to track multiple bets and there are much easier ways of making or losing money.  If you want to bet among yourselves, of course, please do so.

3 Responses to "Bets on China – The Economist Sees (and Raises)"

  1. rodeneugen   March 31, 2012 at 9:12 am

    ‘The answer to high or reduced growth is in China itself’

    ‘China has to take global economic responsibility and by doing so it will grow again annually 8-10%.
    Assuming that the advanced nations economies will probably shrink rather than grow in the next five years and the Chinese economy grow at an average rate of about 8-10%, China will be the greatest world economy in less than 10 years. That means within 6 to 10 years China’s GNP (PPP) will be about US$ 15 trillion (compared to about 80 trillion US$ of the world economy).
    To be able to create this additional production, additional demand of the same size has to come from someplace. The question is from where it will come? Very probably the advanced nations have no capacity to increase their demand. On the contrary, i expect a decrease of consumption and imports in USA and probably in Europe and Japan too. The source of this additional demand can come only from the emerging economies, which are trying to catch up with the advanced nations. (Wasn’t this the declared aim of the world institutions, to diminish poverty and redistribute worldwide the economic wealth?)
    China of course is the leader amongst these emerging economic regions, which include India (with more than 1.4 billion people), Latin America (about 700 million people) and the South-East Asian countries (about 600 million people). The total population of these regions is about 4 billion people, compared to about 1 billion people in the advanced nations. These regions with emerging economies, with young and growing populations (in contrast to the ageing and stagnating populations of the developed nations), are about to take over the leading role in the world economy within few years. The question is to what direction those emerging economies are going to take their economic and social development. Most probably they will try to copy the economic and social policy of the advanced nations, where the driving force of the economy is profit and over-consumption. It seems, our planet is having difficulties carrying on with the today’s existing appetite for consumption in the advanced nations and it will be almost impossible for the world to cope with an additional 4 billion “over-consuming” people. It seems inevitable, that any attempts by the emerging economies to achieve the similar levels of consumption as in the advanced nations, will create competition for raw materials and energy sources, and will have a severely detrimental impact on the natural environmental. We actually started to see this scenario in the years before 2008, when the commodity and energy prices skyrocket and we can see the same process starting again. It seems that in today’s technologies, the world level of consumption is close to its upper limits, and any attempt to increase it in one region will have to come on account of another region.
    The current economic crisis, started to solve the problem of the uneven distribution of the consumption in the world, since it had hit primarily the most developed regions, and less so the emerging economic regions. The economic stimulus made by advanced nations governments, is actually an attempt to forestall a reduction of consumption in the advanced nations and it had temporarily moderated such a shift of resource use. On the other hand it prevented sudden deep economic crisis, that could have catastrophic political consequences (let us not forget the consequences of 1929 s’ crisis). Yet the economic stimulus can slow down the process of more evenly redistribution of the economic wealth, but can’t stop it.
    China’s economic policy, actively supported by US economic policy, in the last thirty years, was to develop its economy on exports. This policy was addictive for both sides, and when prolonged and exaggerated very damaging to their and world economy. An increase of consumption level of a nation is politically and socially easy, its decrease is almost unacceptable. USA is still in the grasp of its addiction to cheap products from China, as contrary to China, that can easily change this unbalance in the world economy. With its current size of economy, China can not make any longer such macro-economic mistakes without causing a major disruption in the world economy. This brings us back to my words at the beginning of this comment, “China has to take global economic responsibility”.

  2. joseph glynn   April 4, 2012 at 6:15 pm

    Yes. Thank-you for sober realistic projections. Given the sheer scale of the property boom in China in recent years, and the associated expansion of credit , money supply growth, land price inflation, construction employment and other spin-offs, I cannot believe that China's recent GDP growth rates can be sustained. Lets hope for the best an
    Joe Glynn, Dublin