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China: Don’t Look Now But. . . (Update)

You may recall that back in the late 1980s, lots of certified smart people like James Fallows and Clyde Prestowitz were telling us that Japan was eating our lunch in terms of economic policy, because they had embraced the kind of government-led industrial policy that used to put a spring in Walter Mondale’s step.  It was confidently predicted that at the present rate, Japan might well overtake the United States as the world’s largest economy by the year 2000.  It makes a difference, Prestowitz thumped, whether the United States makes microchips or potato chips.  I remember being skeptical at the time, and didn’t have to wait long before Japan threw in all its chips and hit the wall.

China became Japan’s successor for elite America’s never-ending foreigner-envy, with the China-Is-Awesome caucus (Tom Friedman, chairman) telling us that despite the fact that China’s turn toward markets and private investment in the late 1970s accounts for the largest rapid lift of hundreds of millions from poverty ever, somehow we should ascribe this to China’s authoritarianism.  (Really—this is Friedman’s argument.)  China, all the certified smart people tell us, is on its way to overtaking the U.S. as the world’s largest economy sometime in the next couple of decades.

Count me as skeptical (as I’ve mentioned before here, here, here, and here) for the same reasons the Japan story was oversold: demographics (China is getting old in a hurry) and the asymmetries that always emerge eventually when the public sector dominates the market as it did in Japan, here in the U.S., and behind the scenes now in China.  (Add in the “low-hanging fruit thesis” of cheap labor, etc.; many of these advantages are already eroding to hungrier neighbors like Vietnam.)  It’s just a matter of time.

Ambrose Evans-Pritchard brings some common sense to the subject in a column in today’s Telegraph:

China’s catch-up spurt has a few more years to run in the Western hinterlands perhaps, but when the full story comes out we may find that nationwide growth has already fallen below 7pc.

Mr Li complained in a US diplomatic cable released on WikiLeaks that Chinese GDP statistics are “man-made”, confiding to a US diplomat that he tracked electricity use, rail cargo, and bank loans to gauge growth. For a while, analysts use electricity data as a proxy for GDP but the commissars kept a step ahead by ordering power utilities to fiddle the figures.

The National Bureau of Statistics has since revealed that data collected by the regions overstates GDP by 10pc, though they have not acted on the insight. It is well-known why this goes on. The reward system of the Communist hierarchy has been geared to talking up growth, and officials gain kudos by lowering the stated “energy intensity” of their zone.

China’s Development Research Council (DRC) expects growth to drop to 6pc by 2020. It could be much lower. The US Conference Board says it will average 3.7pc from 2019-2025 as the ageing crisis hits. Michael Pettis from Beijing University thinks it is likely to slow to 3pc to 4pc over the next decade, deeming this entirely desirable if it comes from taming the runaway state enterprises. . .

. . . China’s 30-year miracle is nearing exhaustion. The low-hanging fruit of state-driven industrialisation and reliance on cheap exports has already been picked. Stagnation looms unless Beijing embraces the free market and relaxes its suffocating grip over the economy.

There’s more, but this is enough.  Stay tuned.  And don’t go long on Chinese banks or construction companies.

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