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.