Justin Yifu Lin insists China can grow at 7-8 per cent for another 20 years. A contrarian with a remarkable personal background, the former World Bank chief economist's views influence his country's top leaders and their sense of destiny. What he says matters. How, and how fast, China grows will be highly consequential; far more than many realise.
Foreigners long underestimated China and many still doubt it can maintain Lin's target. The IMF thinks China needs to slow down and some domestic advisers say trend growth may drop to 5 per cent soon. Opinions range from the sceptical Larry Summers, who sees a 'normalisation' looming, to Nobel laureate Robert Fogel, who projects 8 per cent growth continuing until 2040, with China's economy doubling the US and EU combined. China will by then have caught up to the US in average affluence levels (US$85,000), an outcome Arvind Subramaniam imagines in his book Eclipse.
Let's stay well within Justin Lin's timeframe and suppose China grows at 8 per cent in real PPP GDP terms until 2030. That would mean today's US$10,000 PPP GDP per capita will become US$46,000. China by 2030 would be above Germany's present per capita levels, and 50 per cent richer than Koreans today. The relentless mathematics of compounding means that China has 16 years to pile on US$36,000 of output per head, four times more than the leap achieved in the last 30 years of reforms.
If that happens, there will be unprecedented industrial carnage.
Germany and Korea are nations that China seeks to emulate. They have manufacturing companies which dominate globally, both in scale and expertise. The rise of both was industrially disruptive. Germany crushed the British chemical and electrical industries a century ago, and today its car makers pummel European rivals. Korea's giants came to dominate memory chips and shipbuilding by bankrupting overseas competitors. If China continues to rise, Detroit's fate might be repeated 20 or 30 times: Silicon Valley, Basel, Cambridge, Munich, and Nagoya would all be at risk. If China resembles 20 Germanys or 30 Koreas, it will dominate world business with 400 of the world's top 500 companies.
Of course business isn't zero-sum and others won't stand still. Yet to fulfill Lin's promise China must necessarily relegate most of today's multinational corporations to niches or to extinction. This has happened already in telecoms equipment and wind turbines. China will need many more such cases. Today the equity value of Chinese companies is relatively puny, China has few global brands and quality companies are scarce. The success of Alibaba is deservedly celebrated, and the state basks in its reflected glory (the irony is that Beijing's high-tech protectionism didn't author Alibaba's success, but holds it at risk).
Anyway, Alibaba is less a high-tech company than an e-commerce firm (or simply a 'commerce' firm, as its chairman says) gobbling up 8 per cent of China's entire retailing market. Riding the scooters of cheap deliverymen, it imperilshundreds of thousands of stores in China's labyrinthine bricks-and-mortar economy. This is not to say Alibaba is not innovative; it certainly is disruptive, but in the most prosaic of businesses. That sort of creative destruction will confront many industries, inside and outside China.
China cannot pursue just an export-led strategy — the world couldn't absorb a US$2-3 trillion Chinese annual surplus — so it must develop its domestic economy.
To do so, China has relied on investment, largely funded by credit. Spurred on by Lin's exhortations, Beijing pursues agrowth-at-all-costs approach. John Lee reckons investment is half of GDP and that capital/output, a measure of investment productivity, has deteriorated from 2.0 to 5.5 since the 1980s. True, diminishing returns occur everywhere, and the statistics may be rubbish. But China does still need a lot more capital. The problem is that China's capital is already debt-heavy; the 100 percentage point increase in aggregate debt/GDP in six years is troubling. With its mechanistic approach to growth ('7.27 per cent for the next decade' says one expert), Beijing risks over-reaching. It needs a revolution in productivity, epitomised by Alibaba's asset-light business model. Otherwise Lin's targets might require debt/GDP to increase 10 per cent every year, heading quickly for Japanese levels.
China's energy efficiency, though improving, is poor. On projected trends China could burn half the world's carbon by 2030. Great effort is being made in renewable energy, which figures highly in Beijing's plan for future industrial leadership. Still, more coal continues to get mined. It isn't clear that Beijing will forsake its revered GDP growth target for the sake of global CO2 emissions, but domestically China faces pressing pollution challenges which it will be more motivated to solve. Reportedly Lin favours a 'pollute first and pay later' policy. This boosts growth but is ruinous longer term. A dirty factory that creates $1 of output but costs $1 to clean up generates $2 of GDP and no wealth. Repair activity, like soil remediation, is colossally expensive but ultimately unproductive. It makes people busy now but poor later.
If Justin Lin is right, China will 'rule the world' economically, if not by 2030 then certainly before mid-century. Its domestic economy will far surpass anything on the planet, its companies will tower above all, it will be the prime money-mover globally, it must lead technologically and the West's middle and working classes will be industrially and financially sidelined. If he is wrong, but China's leaders insist on his growth imperative anyway, then China will become highly indebted, parched, polluted and frustrated. That is why I am listening closely to Justin Lin.
Originally published by The Lowy Institute publication The Interpreter. Republished with permission.