Ever since China slowed from unsustainable 10 per cent-plus growth figures in the pre-2008 decade, there has been a barrage of voices foreseeing a painful slump. Some even doubt that China will overtake American GDP.
Meanwhile, official figures show China growing at more than 7 per cent, which is enough to double GDP in a decade and enough to keep an otherwise stagnant world growing.
The pessimists have a bewildering array of arguments, some already overtaken by events. Those who said China could not decouple (could not sustain growth when the advanced countries are in deep recession) grossly overstated the case. The related argument – that China depends on exports for its growth – has also been superseded: as the graph shows, the contribution of net exports to growth has been negative for the past five years.
Most commentators accept that China will continue to grow at around its present pace, but want to fret about a 'middle-income trap' or argue the detail (will growth be 6 per cent or 8 per cent?). But detail is elusive in Chinese statistics: the differences are within the margin of error. The fact is, even if China slows to 6.5 per cent later this decade (as officially predicted), this pace of growth still doubles GDP in under 12 years.
A smaller group predict a more dramatic slowing. Some are pointing to demographics and the impending Lewis Turning Point, the moment when China can no longer boost growth by shifting people out of the vast reservoir of rural underemployment. But, even if labour force numbers have peaked, this turning point is still a decade or so away. Both this and the ageing population ('will China grow old before it gets rich?') are reasons to expect and accept lower growth rates some time in the future, but not this decade.
Among the slump predictors, some argue that it is not possible to go from an investment-driven model (investment accounts for half of GDP growth) to a more normal consumption-driven growth model without a sustained period of slow transitional growth.
The most vocal of these, Michael Pettis, has a still-running bet with The Economist that growth this decade will average 3 per cent. Given the growth that has already occurred this decade, the economy would have to average zero for the rest of the decade for him to win. In his current writing, he has fuzzed the growth number and pushed the stagnation out in time, but maintains the core argument.
When even the former Chinese premier describes the growth model as 'unsteady, unbalanced, uncoordinated and unsustainable', it's easy to agree that things need to change. Indisputably, there is always a challenge in transition.
But China has often confounded its critics, avoiding foretold disasters and diverging from unsustainable paths. As already noted, the export-driven growth model has been replaced. The current-account surplus has been reduced from over 10 per cent of GDP to 2.5 per cent. The real exchange rate (adjusted for inflation to give a measure of international competitiveness) has appreciated by around 25 per cent in the past five years. Comparing real wages would show an even larger adjustment of competitiveness. Despite sclerotic banks and a shambolic shadow banking sector, China has so far avoided a financial implosion.
Boosting consumption can't be done overnight (and so far the transformation has hardly registered in the macro figures, even though real wages and disposable income are both rising faster than GDP). But arranging for the population to increase its consumption seems a less daunting task than those faced by Europe (where the talk is 'austerity, from here to eternity'), the US (where taxes have to rise and social security and health-care spending have to fall), or Japan (where official debt is well over 200 per cent of GDP and rising).
It's worth noting that this transition has been done before, famously by Japan, but more recently by Singapore, which adjusted from a similarly investment-dominated growth model. Moreover, China doesn't have to stop investing. With annual GDP growth at around 7 per cent, China would need investment close to 30 per cent of GDP just to keep the capital/output ratio stable, and on top of this has to narrow the huge shortfall in its capital-per-worker compared with advanced countries.
Any realistic forecaster would accept that there are many potential mis-steps ahead for China. China will have to do something about pollution, and this will be costly without adding to output. No doubt a good proportion of past investment projects wouldn't pass a rigorous cost-benefit test. But then again, neither would the Sydney Harbour Bridge, with its grossly-excessive capacity when it was built in 1930.
The missing element from the low growth narrative is that unemployment would rise, provoking a stimulatory policy response. China would extend the transition and put up with low-return investment (recall that when unemployment was the issue, Keynes was prepared to put people to work digging holes and filling them in) rather than have unemployment rise sharply. To be convincing, the low-growth scenario needs to explain why this policy response will not be effective.
Somehow most countries muddle through with sub-optimal policies, bumpy transitions and more corruption and incompetence than is optimal. Doom merchants and drama queens can be wrong again and again, and then claim clairvoyance if their bottom-line forecast eventually comes to pass, for whatever reason.
Growth-sustaining reform is underway. The frustration for policy makers everywhere is that they have to be right all the time to silence their critics. The Chinese may feel that the bar is being set higher for them than for others in a very imperfect world.
Originally published by The Lowy Institute publication The Interpreter. Reproduced with permission.