Every now and then, a novel idea enters the public domain. At first, that idea sounds a bit off-beat – almost revolutionary. Eventually the idea is taken up by more and more people so that it manages to reach the mainstream. Beyond that, if the idea gains traction, it becomes part of a new conventional wisdom. Once there, anyone who questions the idea is seen as something of a crank. The ideas behind the rise of China fall into this path. Originally, at the turn of the century, the notion that China would be a rising super-power was seen as fanciful. The then conventional wisdom of the Washington Consensus had no place for China.
Goldman Sachs questioned that conventional wisdom when they developed the notion of the BRIC economies. Over the course of the decade, as the BRIC economies grew relative to the OECD economies, so the notion took hold. It has now reached the point where it has become the conventional wisdom. I attend a number of futurist meetings each year and at each one I am greeted by the mantra that China will have the largest economy in the world by the 2020s. Personally, I very much doubt this.
My cause for scepticism is threefold. First, there is the question of demographics. The ‘One Child Policy’ has served China well to date but, at some point in the coming decade, it will go into reverse, giving rise to a sharply growing dependency ratio (the ratio of working population to non-working population). Unless China experiences a very high level of labour productivity growth to compensate, as the size of the working population falls, so GDP growth will come off the boil. The decade may witness the reduction of GDP growth in China to the 5% to 8% band.
At this point the second cause for scepticism assumes importance. As time goes on, the law of large numbers will start to act as a constraining factor to the Chinese economy. High growth rates are easier to achieve when the economy is relatively small, but much harder for a large economy to maintain. This is why the growth rates of the BRIC economies are much higher than those of the OECD economies. For example, the raw materials that are needed to run the Chinese economy at it’s present levels have caused most markets for raw materials to tighten. At some point during the next decade or two the demand for those raw materials is likely to exceed the capacity to supply them, acting as a limiting factor to further growth.
Third, to close the feedback loop, China has a very high savings ratio – mainly in response to the absence of a welfare safety net, as most Europeans would understand it. The private sector is saving through bank deposits, which are, in turn, being lent to fuel property and stock market bubbles. Usually, the creation of such bubbles suggests a lack of productive investment opportunities and foreshadows a financial crisis as and when those bubbles burst. Any slight disruption to the Chinese economy could lead savers to ask for their money back, precipitating something of a financial crisis. Given that the Government of China has deposited its surplus funds in US Treasury Bills, there are grounds to suspect that financial contagion could spread quite quickly. If that were to happen, then the overtly nationalistic policy of the Chinese Government could well hamper a co-ordinated global monetary response to contain the contagion.
This is not to say that we are predicting the financial collapse of China. What we are saying is that the development of the Chinese economy is a lot more fragile than it appears, and that an uncritical view of the conventional wisdom does not encourage a balanced review of future prospects. It is correct for futurists to point to a trend of China becoming a greater economic force in the world. However, good futurists would also point out that for every trend, there is also a an important counter-trend that could well turn into a new conventional wisdom. Over the past few months, I have noticed the growth in the China-sceptics. More and more articles that question the conventional wisdom are being published (I have included the links to a couple below), which suggests that we might be seeing the start of a turning point.
Only time will tell if the case for China has been over-made. However, given its importance, I think that it is an issue to which we will return from time to time.
© The European Futures Observatory 2010
Contrarian Investor Sees Economic Crash in China (New York Times 07/01/2010)
Think Again: Asia's Rise (Foreign Policy, July 2009)