China economic prospects in perspective

Ruchir Sharma, as always, brings together several interesting facts to put China's economic growth prospects in perspective

China is now a middle-income country, a stage when many economies naturally start to slow given the higher base. Its per capita income is currently $12,500, one-fifth that of the US. There are 38 advanced economies today, and all of them grew past the $12,500 income level in the decades after the second world war — most quite gradually. Only 19 grew at 2.5 per cent or faster for the next 10 years, and did so with a boost from more workers; on average the working age population grew at 1.2 per cent a year. Only two (Lithuania and Latvia) had a shrinking workforce. 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. Then there’s the debt. In the 19 countries that sustained 2.5 per cent growth after reaching China’s current income level, debt (including government, households and businesses) averaged 170 per cent of GDP. None had debts nearly as high as China’s...

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. In this situation, 2.5 per cent growth will be an achievement. Sustaining basic productivity growth of 0.7 per cent will barely offset population decline. To hit 5 per cent GDP growth, China would need capital growth rates near those of the 2010s. Most of that money went into physical infrastructure: roads, bridges and housing. Given the scale of the housing bust, it’s likely overall capital growth will fall back to about 2.5 per cent.

This, on the economic side, goes along with the political risks associated with President Xi Jinping's policies. I have blogged extensively on the perils of the Xi Jinping Turn, and how Xi looks likely to turn out to be China's latest Bad Emperor. The knock-on effects of President Xi's policies on the Chinese economy will be severely damaging. The Xi Jinping discount could clip another percentage point from China's economic growth in the years ahead.