As China continues scoring own goals month after month, both, on the political front (with a megalomaniac in charge who is purging anybody opposed to him) and on the Covid front (with the country’s never ending lockdowns), a host of commentators are calling time on the country’s growth story. In this short but hard hitting piece Ruchir Sharma makes a series of points about the epic scale of China’s upcoming woes. First off, he says there is a disconnect between Xi’s grandiose projections and what the underlying high frequency data is saying: “Xi Jinping’s goal is to make China a mid-level developed country in the next decade, which implies that the economy will need to expand at a rate of around 5 per cent. But underlying trends — bad demographics, heavy debt and declining productivity growth — suggest the country’s overall growth potential is about half that rate.
The implications of China growing at 2.5 per cent have yet to be fully digested anywhere, including Beijing. For one thing, assuming that the US grows at 1.5 per cent, with similar rates of inflation and a stable exchange rate, China would not overtake America as the world’s largest economy until 2060, if ever.”
Secondly, he says that China’s adverse demographics (i.e. shrinking population) stack the odds against it even further: “China is an outlier. It would be the first large middle-income country to sustain 2.5 per cent gross domestic product growth despite working-age population decline, which began in 2015. And in China this decline is precipitous, on track to contract at an annual rate of nearly 0.5 per cent in the coming decades.”
And thirdly, he draws attention to China’s remarkably poor record of generating returns from investing capital: “Before the 2008 crisis, China’s debts held steady at about 150 per cent of GDP; afterwards it began pumping out credit to boost growth, and debts spiked to 220 per cent of GDP by 2015…China avoided a deeper slowdown thanks to a tech sector boom and, more importantly, by issuing more debt. Total debt is up to 275 per cent of GDP, and much of it funded investment in the property bubble, where all too much of it went to waste.
Though capital — largely property investment — helped pump up GDP growth, productivity growth fell by half to 0.7 per cent last decade. The efficiency of capital collapsed. China now has to invest $8 to generate $1 of GDP growth, twice the level a decade ago, and the worst of any major economy.”
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