China

China’s growth prospects: ‘Sinophoria’ or imminent collapse?

BY

JANE GOLLEY considers the arguments over whether China can sustain high economic growth.

In early 2015, China’s Premier Li Keqiang lowered the official growth rate to around 7 per cent—its lowest target in 11 years, and one that is being touted as the new normal rate of growth, in contrast with the heady double-digit levels of the past.

Many independent estimates of China’s growth for 2015 are lower by two or three percentage points—an indication of how much uncertainty there is even in the short term. Longer-term forecasts (or guestimates, as they should be called) vary even more widely, ranging from optimistic predictions as high as 7 per cent through to 2020 and 6 per cent through to 2030 to doomsday scenarios about the economy’s imminent collapse. If the doomsayers are right, the future for the Chinese and global economies is grim.

In a recent paper entitled ‘Asiaphoria versus regression to the mean’, two American economists, Larry Summers and Lance Pritchett reflect on these wide-ranging forecasts. ‘Asiaphoria’ reflects the belief that Asia is destined to become the centre of global economic activity in the next two decades.

Summers and Pritchett challenge this view for being too optimistic, because forecasters tend to place too much emphasis on recent rates of per capita GDP growth, which—given those of China and India compared with Europe and the United States—drives this Asiaphoria.  Instead, they analyse a long time series of cross-country growth data and argue that China, like all other countries, will inevitably regress to the mean of long-term historical growth trends at around 2 to 3 per cent. That is, a country’s future growth performance has very little to do with its own past performance, and more to do with historical norms of growth everywhere.

As they show, the difference in the future size of China’s economy based on an extrapolation of current growth rates versus regression to the mean is huge: the former would increase China’s GDP by $51 trillion by 2033, compared with $11 trillion for the latter, making this a $40 trillion dollar question.  Summers and Pritchett then argue that for China to defy the ‘unavoidable truth in the numbers’ and continue to grow above the mean for an extended time period, there would need to be something extraordinary about the country.

China’s future rates of economic growth depend critically on the ability of the Party to remain in power.

Surprisingly, they cannot come up with anything that fits the bill. Instead, they argue that growth collapses are common, and often vastly underestimated. In China’s case they suggest that the high degree of government involvement in business and the authoritarian regime add to the likelihood of a growth slowdown there. Building on this, they explain how a transition to democracy would severely disrupt China’s institutional framework, which has until now provided favoured firms with connections to the existing power structure. A shift in power away from the Party would then ‘precipitate very sudden stops as investor expectations have to realign to new realities’, with economic growth collapsing as a consequence.

I’m not convinced by all of their logic, but one thing I do agree with is that China’s future rates of economic growth depend critically on the ability of the Party to remain in power.  According to David Shambaugh, Professor of Political Science and International Affairs, at the George Washington University, that ability is rapidly diminishing. His 2015 essay in the Wall Street Journal titled ‘The coming Chinese crack-up’ lists five indications of the regime’s vulnerability: the intensification of political repression, the false pretence of compliance with the party line, rampant corruption; the large number of China’s elites with ‘one foot out the door’; and the economy, which is ‘stuck in a series of systemic traps from which there is no easy exit’.

Endgame

This leads Shambaugh to claim that ‘The endgame of Chinese communist rule has now begun’ and ‘its demise is likely to be protracted, messy and violent’. He doesn’t claim to know when the Party’s demise will actually occur, but nevertheless concludes that ‘we are witnessing its final phase’.

This is certainly not how Xi Jinping sees it. At the National People’s Congress in March 2015, Xi introduced his ‘four comprehensives’, which are being propagated by the state-controlled media as a major contribution to Communist Party ideology. These tie together his ambitions to pursue economic and legal reforms, maintain party discipline and achieve the ‘Chinese dream’ of national rejuvenation. This, on top of his sweeping anti-corruption campaign, which has targeted hundreds of thousands of officials at all levels of government and industry, reaffirms his commitment to reforming the economy while maintaining a tight grip on political power.

As the world’s soon to be largest economy, with the world’s largest population, run by one of the world’s very few one-party states, I think there are many reasons to think that China’s future growth trajectory will not conform with historical norms. That is not to say that I am confident that the Party will steer its way through an economic reform process that will deliver both strong economic growth and stability to its people indefinitely. But if I had to pick sides between Xi and Shambaugh, I’d stick with Xi for now.

Photo Wikimedia Commons.
Can China’s soaring growth continue?  The Shanghai Pearl television tower.

About Jane Golley

Jane Golley is Associate Director, Australian Centre on China in the World, Australian National University.

Published:
19th May, 2015

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