Monday, February 12, 2018

China’s irresistible rise

[For every article or three about how China's growth is unsustainable, and how an implosion/ correction/ recession/ retribution is imminent, there will be defenders explaining why all those fears and predictions of doom are wrong.

Of course, official defenders' (i.e. China's government) credibility are suspect simply because they are not independent. 

Non-official or opinions from those with no vested interest (at least none overtly detectable), are a little more credible.

Here is one, non-official defender.]

By Jim O’Neill

11 February, 2018

China’s recently released GDP data for 2017 confirm it: the country’s dramatic rise, with the concomitant increase in its global economic relevance, is not slowing down.

To be sure, there has been fresh media chatter about the reliability of Chinese data, owing to reports that some provinces have been overestimating their economic performance in recent years. But for all we know, other provinces may have been doing the opposite.

[Right! It must be the vaunted Chinese sense of modesty where provincial government abjure their need to report high GDP growth and instead understate their economic performance because it is more important that they appear modest and unambitious. ]

And in any case, the provinces that have admitted to inflating their data are not large enough to have a significant impact on the national picture.

[That we know of. But yeah. Just because they caught a few crooks, doesn't mean that there are more crooks.]

Moreover, two key points are often lost in the debate about China’s official statistics, which the country first starting releasing in the late 1990s.

First, the debate is relevant only if China is increasing the degree to which it overestimates its data. Second, China’s published data should be considered in the context of its trading partners’ own figures, as well as those of major international companies that do business in China.

As I have written before, it is telling that China has overtaken both France and the United States to become Germany’s top trading partner.

As for the annualised 2017 data, most of the media focus has been on China’s reported real (inflation-adjusted) GDP growth, which, at 6.9 per cent, represents the first acceleration in a couple of years and an improvement even on the government’s soft target rate of 6.5 per cent.

[But for the longest time, I was reading that China needs at least 2 digit GDP growth. In the last few years, they have lowered the bar to about 7%. And then for 2017, it was moderated to 6.5%. Was it because this is what is really required, or was this their prediction for GDP growth in 2017, and they "moved the goalposts" so that they can score?

I don't know. But I am sceptical.]

But the more important figure is China’s nominal GDP growth translated into US dollars. Owing partly to a strengthening renminbi, China’s total economic output grew to US$12.7 trillion (S$16.7 trillion) in 2017, representing a massive increase of 13 per cent (US$1.5 trillion) in just 12 months.

Clearly, those who have warned that China is following in Japan’s footsteps and heading for a long-term deflationary cycle have been far off the mark.

To my mind, such simplistic comparisons are never particularly useful. Not only has China averted the risk of deflation; it has done so with an appreciating currency.

When my former Goldman Sachs colleagues and I first started tracking the rise of the BRIC economies (Brazil, Russia, India, and China) in the early 2000s, we figured that it would take until the end of 2015 just for China to catch up to Japan.

Yet 2018 has barely started, and already China’s economy is two-and-a-half times larger than Japan’s, five times larger than India’s, six times larger than Brazil’s, and eight times larger than Russia’s. It is also larger than the entire eurozone.

China’s staggering US$1.5 trillion expansion in 2017 means that, in nominal terms, it essentially created a new economy the size of South Korea, twice the size of Switzerland, and three times the size of Sweden. The latest data suggest that China could catch up to the US, in nominal terms, sometime around 2027, if not before. Within a decade after that, the BRIC countries collectively could catch up to the G7 economies.

Of course, such an achievement would be driven largely by China. Still, taken together, the remaining BRICs are larger than Japan.

And now that Brazil and Russia have put their recent recessions behind them, the BRICs will likely make a large contribution to nominal global GDP in 2018.

One final consideration for the global growth outlook is the Chinese consumer. Many commentators still discuss China as if it were solely an industrial power.

But consumption in China has crept up nearly to 40 per cent of GDP. Since 2010, Chinese consumers have added around US$2.9 trillion to the world economy.

That is bigger than the United Kingdom’s entire economy. British trade negotiators should take note: after Brexit, the Chinese market will be more important to the UK economy than ever.

Yet, in addition to its annualised data, China also recently reported its December data, which revealed monthly reported-retail-sales growth of a slightly disappointing 9.4 per cent year on year.

One hopes that this is a reflection not of a consumption slowdown, but rather of Chinese policymakers tightening financial conditions in the second half of 2017.

Needless to say, as China becomes increasingly important to the global economy, its upside and downside risks will continue to have far-reaching implications for the rest of the world.

And, indeed, a consumption slowdown would be bad not just for China, but also for the rest of the world economy, which is now depending on China’s shift from industrial production to domestic consumption.


[China is important simply because of its size. It did not matter 50 years ago, when it was not plugged into the global economy. Now it is. And it cannot be ignored. Hence our continued fascination with which direction its economy is going.

Because when China sneezes, the rest of the world catches a cold. 

We hope for continued growth from China because that bodes well for the rest of the world. But because we are so well and truly hitch to this star, we need to be able to predict where it is going.

The good news is that China is not stupid, or the people leading it are not stupid. But they are not immune to human foibles, and miscalculations.

So we are wary. And concerned.]


Jim O’Neill, a former chairman of Goldman Sachs Asset Management and a former UK Treasury Minister, is Honorary Professor of Economics at Manchester University. 

[And one more thing. There is regular chatter about China's impending crash. I don't believe it will happen so easily. And so this and the other 2 articles about China bucking the prediction about it slowing down lends credence to the scepticism.

But then again, is this protesting too much?]

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