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Finding The Via Media on China's Future


Will China live up to its promise of becoming the world’s pre-eminent economic superpower? To hear the financial press tell it recently, China’s rather spectacular growth to date is coming to an end for any number of reasons, from its dependence on exports to industrial overcapacity. It’s quite a change from the prevailing conventional wisdom of a few years back, when most were convinced that China’s rise to the top was a foregone conclusion.

Writing at Bloomberg, Jim O’Neill, formerly of Goldman Sachs, does his best to counter this line of argument. In an attempt to be skeptical about the claims of these newly-minted skeptics, he trots out a very bullish assessment of where China finds itself:

China’s economy is already more than three times the size of France or the U.K., and half as big again as Brazil, Russia and India combined. Of the four BRIC countries, China is the only one to have exceeded my expectations. The other three have done less well than I’d hoped.

As I mentioned in a previous column, China is in effect creating another India every two years — making a mockery of those who’ve argued that India’s democratic model is more likely to deliver long-term economic success. China is already more than four times bigger than its southern neighbor. India’s economy won’t rival China’s for a very long time, if ever.

We heartily agree with this part of Mr. O’Neill’s argument. VM has always maintained that the BRICs as a grouping are a nonsense invention of the chattering classes. Each of the BRIC countries are on different trajectories, with China in particular in a class of its own. Brazil is the country of the future and always will be. Russia remains locked in decline, propped up by hydrocarbon riches but unable and unlikely to get beyond that. And the question for India is whether it can avoid falling out of peer competition with China—a decidedly open question with plenty of reasons to have doubts.

But Mr. O’Neill goes further in his article, arguing that China is on the verge of overcoming most of its structural challenges and is poised for a period of robust growth ahead. Unlike Mr. O’Neill, we are not in the business of telling people when to buy or sell stocks in China. But overall, we’re hesitant to be so unqualifiedly bullish. We don’t necessarily think the Chinese economy is on the edge of implosion, but we don’t think it has a smooth long-term path ahead of it either. The devil is in the details on how all this plays out.

The factors creating problems for China operate over the long term. One important thing the article doesn’t seem to note is that social and economic instability increase as an economy grows and becomes more diversified. This means that bullish economic news doesn’t always mean an end to alarming political or social developments. Indeed, at this stage the trend seems to be in the other direction.

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  • Kevin

    A good reminder for us all not to be to sure in our predictions about complicated things and to try to remain open to new evidence and arguments.

  • crocodilechuck

    “We heartily agree with this part of Mr. O’Neill’s argument.VM has always maintained that the BRICs as a grouping are a nonsense invention of the chattering classes”

    Uh, the acronym was christened by Jim O’Neill himself in 2001:

    How embarrassing for you.

    • Enemy Leopard

      How is that embarrassing for Via Meadia? They disagreed with the grouping before, and they still do. It sounds like it’s O’Neill who’s changing his tune.

  • Jacksonian_Libertarian

    Playing catch up is easy, the west basically went into China and built them modern efficient factories, in order to take advantage of cheap Chinese labor. The labor is no longer cheap, the western investment period is over, and will go elsewhere. The other negatives such as an ageing population, weak markets and rule of law, and an illegitimate heavily centralized state, will make it hard to advance economically.

  • Mark

    Jim O’Neill has always been a China shill. A decade ago he was right (on economic growth, but no one made money in Chinese stocks, which are lower today than they were in 2001), but when you hear him these days you cringe in embarrassment because he seems so out of touch. China’s economic growth came from four factors, all of which have largely played out: they devalued their currency by 33% in 1993 and kept it pegged at that level until 2005; they acceded to the WTO on exceptionally favorable terms (very poor governance by developed countries); they had a very cheap labor force; and all of this took place during times of ultra-low commodities prices. Now, their currency is close to fair value on a trade basis, decades of wage growth means the Chinese worker is no longer the low-cost alternative, the favorable WTO terms have either expired or have been so disadvantageous to foreign companies setting up in China that they no longer choose to do so. I short, China can only advance if they drastically change their economic model. Not only has this not been done, it has not even been started in earnest. They continue to march down the path of investment-led, credit-fed growth. Given that the Party would have to cede control over large parts of the economy, which would mean a complete change in the way they govern, and given that the current government has actually gone in the opposite direction of giving up control, I have a hard time seeing the new China coming anytime soon.

  • lukelea

    China’s biggest problem, I think, is the mis-allocation of capital on a mammoth scalde. It is impossible to do it rationally with a state owned (i.e., party controlled) banking system. However, as the old Soviet Union showed, you can build some really impressive stuff. Impressively big.

  • BobSykes

    While China’s gross misallocation of capital is a major problem for them (the ghost cities), the one-child problem is the killer. Already, the number of workers is declining, and soon the whole population will begin its decline. And it will be an elderly population with many dependents and no social security net.

    China’s economy will never surpass the US’s unless our federal government collapses our own economy, as is possible given current policies. China’s power relative to the US is currently at its maximum, and it will decline as its population declines. There is always the possibility of a lash-out as China’s future becomes plain to its leaders, and a shrinking US military might tempt them.

    On the other hand, we are, of course, living in the shadow of the Japanese super state, like we were told 30 years ago.

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