China's economy won't overtake America's anytime soon
A construction site for a highway near the International
Finance Center in Hong Kong.
Some economists
project China could swipe the crown as soon as 2016. But there's a big problem:
We can't trust Chinese GDP data.
Back in the 1960s, economists were confident that the Soviet economy could
overtake the economy of the United States by the year 2000. This chart —
projecting huge Soviet growth — originally appeared in the 1961 edition of Nobel-winning economist Paul
Samuelson's textbook:
(Courtesy of Marginal Revolution)
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Of course, the Soviet Union never achieved such high growth levels.
When the Soviet Union fell apart in 1991, its
economy was barely half the size of America's. Why did projections of
huge Soviet growth turn out to be so wrong? Renegade Soviet economist
Girsh Itsykovich Khanin argued that the growth rates reported by
Soviet authorities were hugely overestimated. While official estimates put the
Soviet economy of 1985 at 84.4 times the output of 1928, Khanin estimated that
in reality it was only 6.6 times the 1928 output. Bad data from the Soviet
authorities led economists like Paul Samuelson to make bad projections.
While there are no projections that today's Russian economy will
overtake that of the United States, many economists are projecting that China,
which has experienced three decades of 9.8
percent average annual GDP growth, is poised to trump America's
economy. According to the Chinese Academy of
Sciences, the Chinese economy is set to overtake the of United States
by 2019. According to the International Monetary
Fund, China could overtake the U.S. as soon as 2016.
On its face, this seems at least plausible. Yes, America's GDP is still roughly twice as large as
China's. But China has become a global hub of trade and manufacturing, and
Chinese central authorities report a current growth rate of 7.5 percent. That's down from 7.8 percent in 2012, but is still a vastly higher
rate of growth than Western democracies like the United States, Britain, and
France can boast.
Still, many say that the Chinese economy is suffering from the same
problem as the Soviet Union — misreported or manipulated data. Here's Gordon Chang of Forbes:
What is the real growth figure? Seeking
Alpha thinks it is around 6.7%, but even
that figure is high. Among other factors, the severe contraction of aggregate
financing in June, the marked fall in exports in May and June, and the evident
shrinkage of the manufacturing sector throughout the quarter all point to an
economy growing in the low single digits.
Moreover, it is unlikely that the National Bureau
of Statistics, in releasing the Q2 number, had made proper adjustments to
account for two phenomena. First, Beijing's official statistics have not been
adequately adjusted for inflation, as Standard Chartered's Stephen Green has pointed out. Second, fake trade
invoicing substantially inflated GDP numbers. Rampant falsification has resulted
in the simply unbelievable report of 14.7% export growth in April, the first
month of the just-ended quarter. Although some say export growth was about 6% then,
it seems like it was actually closer to 3%. [Forbes]
There are further inconsistencies in the Chinese GDP data. This chart, via Yueran
Zhang of the Atlantic, shows that
every Chinese province is reporting higher GDP growth than the national
average.
Data that doesn't add up smacks of manipulation. Michael
Pettis at the Financial Times says thatChina — in the face
of weaker global demand for its manufacturing output and rising Chinese wages —
is hitting the rocks of rebalancing its export-driven manufacturing economy
toward domestic consumption:
Simple logic shows that it is nearly impossible
for China's GDP to grow at current rates while rebalancing away from its
dangerous over-reliance on exports and debt-fuelled investment. Consider what it
means for China to rebalance. Household
consumption, at an astonishingly low 35 percent of GDP, is just over half the
global average.
Attempts to engineer a rebalancing that lifts consumption
over the next 10 years to, say, 50 percent — which will still leave it with the
lowest consumption share of any large economy in the world — would require
consumption growth to exceed GDP growth by close to 4 percentage points every
year. So an average annual GDP growth rate of 6 or 7 percent requires average
growth in consumption of nearly 10-11 percent for a decade for China to
rebalance meaningfully.
China was not able to achieve such high
consumption growth rates even in the best of times, when it and the world were
growing much more briskly, and it will prove near impossible for China to manage
such high consumption growth under much weaker Chinese and global conditions.
[Financial Times]
While the Chinese economy is unlikely to be facing a Soviet-style
collapse — it really is a hub of global manufacturing, and the global number one in imports and
exports — it could be in for some rocky years ahead as its economy
rebalances to consume more and manufacture less. So, like the Soviet Union, all
of those projections of China soon overtaking America may come to
nothing.
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