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Slowdown Ahead for Chinese Giant

The Peterson Institute for International Economics has just released a report that many Americans (and doubtless many Chinese as well) will find shocking: Estimates of Chinese GDP by Purchasing Power Parity (PPP) have been revised upward, and China may have already surpassed the United States.

While this is news, it may not be particularly meaningful from a geopolitical point of view, or at least not as meaningful as Beijing would wish. China is no stronger than we thought it was, and even though its GDP has grown over the past ten years, sheer size isn’t everything.

The most surprising finding, however, can be found toward the end of the piece:

. . . if one believes in the process of convergence or catch-up, which implies that countries slow down as they get richer, future growth projections for China might have to be revised downwards because current standards of living for the average Chinese person are much greater than previously supposed.

Now this is big news. As the Chinese get richer, the economy will begin to slow. Developing economies often grow quickly by picking the abundant low-hanging fruit, and China’s high living standards suggest that there may not be much of that left. From now on, China will have to get used to the more moderate growth experienced by other developed countries.

It remains to be seen how Chinese society will adjust to the slowdown.

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  • Jacksonian Libertarian

    Things are worse for China than this report suggests. The corrupt Government drains the economy of efficiency, the export model policy of currency manipulations is becoming unsustainable the eventual blow-back will drive many of China’s businesses into bankruptcy, and the demographics for China are probably the worst of any nation on earth. It wouldn’t be surprising for China to go into a multi-decade long depression like Japan is in, or worse. The only shred of legitimacy that the Chinese Communist Party has is their management of the economy, so if the economy goes into a long decline there goes the only legitimacy they had. The Communists will be able to paper over the mismanagement for awhile with their foreign currency reserves, but they overpaid for those as part of their currency manipulation for decades, and now the supply is so large “Supply and Demand” will cause their value to decline even further. Finally, the Chinese have been choosing to abort females and this has created a large population of single males with no families to protect, when it comes time for bloodshed there will be armies of frustrated young men in the streets with nothing to lose.

  • Luke Lea

    A grossly misleading post. Average wages in China’s export zone are under $1.50, and about 800,000,000 haven’t gotten there yet.

    Purchasing Power Parity? How do you compute that in a peasant society?

    China has managed to become the most unequal society on the planet however.

  • Luke Lea

    Purchasing Power Parity from someone who has been there:

    libertastotus 07:34 07 Aug 11

    China is lack of a commercial infrastucture to sustain vital across-the-board domestic consumption. In Bejing, the captital of the country, with a very dense population just like New York or London, in most of the areas you can’t even find convenient stores to buy a bottle of water or soda. You can buy a bottle of water from small cigarette stands as there are plenty of them. However, you have very limited choices for a bottle of soft drink at a cigarette stand. That’s the capital, the most developed city of the nation. I visited that city a number of times, and I walked around a lot. That’s a personal experience. You want to buy electronic gagets in Beijing, go to this area called Zhongguancun. There are a number of huge buidlings that are termed as the mega malls of electronic goods. When you go inside, you realize on every floor there are dozens or even more a hundred small booths that sell similar items one next to the other. You don’t know if a booth carries what you are looking for and there are no pricing labels on the any of the items on display. You start with one booth, ask for what you are looking for, find out about the pricing, bargain with the shop keeper, and you repeat those activities onto the next booth. It was not easy to shop in those mega malls. One time I was there to look for a power adator for the 220 volt wall outlets in China. It took me a good hour to finally find one. Domestic consumption? There is a long way to go.”

  • Luke Lea

    “China’s high living standards suggest that there may not be much of that left”

    Sorry. This doesn’t pass the laugh test.

  • Luke Lea

    Ok, I’ve actually gone to the trouble of reading Mr. Arvind Subramanian’s paper, and the one he wrote last year to which he refers. Here are some key quotes with my remarks in [brackets]:

    1. “But it has long been recognized by many economists that using the market exchange rate to value goods and services is misleading about the real costs of living in two countries. Such goods and services as medical services, retail and constructions services, and haircuts—which are not traded across borders—are cheaper in poorer countries because labor is abundant. Using the market exchange rate to compare living standards across countries understates the benefits that citizens in poor countries enjoy from having access to these goods and services.” [In other words nations are rich because they are poor]

    2. “Data on prices were collected for 11 cities and their surroundings but no rural prices—which are typically substantially below urban prices—were collected (or rather allowed to be collected by the Chinese authorities).” [because we weren’t allowed to collect data things were probably a lot cheaper inland; therefore China is richer]

    3. “One interesting question is why China did not allow more representative prices to be collected as part of the ICP project in 2005. Professor T. N. Srinivasan of Yale University has long argued that China likes to exaggerate its growth rate (to showcase its strength and dynamism) and simultaneously understate its level of GDP (being seen to be poorer may have advantages internationally, such as not being expected to contribute financially to global institutions or global public goods). Overstating prices has the effect of understating GDP, and thus helps achieve this objective.” [China lies as it pleases about its economic statistics, so we really have no good measure of what is going on outside their export zones, where we have some idea of what is coming into and out of their ports.]

    4. “Perhaps a more important explanation of China’s behavior has to do with exchange rate politics. Had all prices been collected, China’s average price level (cost of living) would have been substantially lower. And this would have resulted in estimates of undervaluation of the Chinese currency of close to 40 percent against the dollar (see Subramanian 2010 for the connection between China’s price level and the implications for estimating whether currencies are under or overvalued). China’s trading partners would have had additional technical ammunition to deploy against its highly sensitive but demonstrably beggar-thy-neighbor exchange rate policy.”
    [Same story again. You can’t trust them, therefore we know what is really going on. We used to deal with the old Soviet Union like this back in the 1960.s. Samuelson’s textbook predicted the Soviets would be passing us real soon based on the data.}

    There is a great book by Oscar Morgenstern, a nobel prize winning economist, On the Accuracy of Economic Observations. Whoever wrote this post ought to read it. So should the guy at Peterson. Right now you’re both just playing with meaningless numbers.

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