Wednesday, 13 January 2010

The Rise Of The China-sceptic.

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)


Charles Stirton said...

I agree with Stephen that the case for China is a bit overblown. However, two wildcard issues may effect the Chinese potential, one negatively, one positively. Firstly, the serious imbalance of male:females in China, especially in impoverished rural areas where the major population resides. This could create civil unrest in due course. Secondly, China has a near monopoly on access to rare metals which are essential to power the emerging green and new technology economies the west is pinning some economic hopes on. This could weaken those economies as rare metal supplies dry up. The third wild card is the potential unification of Korea. All food for thought.

John Kurman said...

I would also think the plight of China's rural poor is something to consider. The government is trying to hide civil unrest in rural areas, and, to some extent, address the problems. But I think it will play a part in any futurist's scenarios.

bw said...

China's dependency ratio does not look to rise to significant levels until 2025

Meanwhile urbanization on track to the 75-90% level looks to continue to provide a +3% GDP boost each year for 15-25 years

Boston Consulting Group has some detailed analysis of China's middle class emergence from 2011-2020. This will provide domestic consumption and a more balanced economy.

Stephen Aguilar-Millan said...


The point about the dependency ratio depends upon whose figures you use. The Economist - working from UN projections - sees the dependency ratio increasing (and becoming a problem) from the middle of this decade. See

The point is that if The Economist is right (and Deutshe Bank wrong), what does that mean? Surely a good futurist would allow for both possibilities in their reckoning?

That is what the post is all about - that there is a case against China as well as a case for China. It's just that the contrarian view rarely gets aired.


bw said...

A dependency ratio that starts to rise is not a problem. It has to get to significant levels. Plus the elderly dependency ratio relates to the age of the cutoff.

60years or 65 years. But China leaders can easily make the move which many western countries have trouble with politically. Telling it citizens - tough it out work to 70 or 75 or even 80.

Stephen Aguilar-Millan said...


You are right that by the time this all comes to pass, we may have redefined the cut off points (as is gradually happening in Europe).

However, I do think that you have missed my main point in the piece - that good futurists consider as many possible futures as they can rather than just the ones that they think are most likely.


bw said...

I consider a wide range of possible futures but if some of those futures can be shown to be impossible, then that is better than making a list that has not filtered out the impossible. The best futurists are people like Bruce Bueno de Mesquita who can accurately predict complex political results. My goal is to look at the current situation and history to see what the true drivers of developments are. I do not just look at technology but demographics, politics and economics and as much other major factors as possible. The relative power of the factions driving different choices and the power of factors in the environment need to be understood. There are scenarios where China will under perform or have a calamatous result but just population aging will not be the primary downfall in the next twenty years. Plus medicine and places like Japan are leading the development of mitigation against frail and less productive elderly. (65-80 now). I see a lot of progress towards increesing lifespans and productive healthspans by 0.25 years for each year that passes and this level will be increasing to 0.5+ years per year in the 8-20 year timeframe. If you are looking at 2035+. Then China can start adopting Singapores policies of encouraging more children to alter the number of youth in that next generation.

Stephen Aguilar-Millan said...


What does an impossible future look like?

We have done some work on 'Wild Card' scenarios (low probability, high impact) and it has led me to conclude that very few futures are impossible.

Very unlikely, perhaps, but not impossible.

We think it bad practice to filter out improbable futures because it leads to the type of planning mistakes that beset organisations (e.g. missing 9-11, even though the early warning signs were there).


Vince said...

China-scepticism (Sinoscepticism?) deserves more air-time. bw: you comment that China's leaders have the advantage of being able to tell people what to do, but this is increasingly being proven not to be the case. There are growing reports of industrial unrest, not due to political activism but because the Chinese labour forces are increasingly coming to expect the same treatment as their Western counterparts.

I have always been very sceptical of the "rise of China" phenomenon, as although I don't doubt that Chinese influence will increase in the years to come, it seems to me that this will turn out to be as much hot air as the Soviet and Japanese domination scenarios that came before it.

bw said...

BTW: Under what conditions and milestones would you admit that your China Skepticism was wrong ? In say seven years when official nominal GDP estimates are indicating that China is passing the United States overall economy or say in fifteen years if China is about double the US economy. Or would you still be expecting a China crash at those points ?

Stephen Aguilar-Millan said...

I don't think that China-scepticism would be wrong per se. We are talking about a future that has not yet happened, which is why futurists don't actually make predictions - they alert people to possibilities.

At this point in time, all futures are possible, the trick being to consider under what circumstances a given future could come to pass.

Going back to the case of China, the passage of time will validate or falsify the empirical statement. For example, the CIFS have said that the GDP of China could be greater than that of the US by 2015. In 2015, we will know whether or not that has happened. Alternatively, Goldman Sachs proposed the date of 2025. In 2025 we shall know if that statement is true or false.

In either case, China scepticism wouldn't be wrong - it is correctly held a priori - but is could be mistaken or misplaced - a posteriori events would show it to be held on incorrect assumptions.

I am afraid that the world of futures is not governed in black and white terms such as 'right and wrong'. As all things are possible in the future, when we see them from the present they are simply convincingly or unconvincingly argued.

bw said...

Future scenarios and predictions can and should be right and wrong. I think it is useful to place more strict and accurate definitions and predicted ranges so that it is clear what scenario is taking place.

If you are a new york yankees skeptic for the 2011-2012 season, then you would define what that means. Are you a skeptic that they will not win the world series ? that has been done by them 27 times out of 90 since 1920. And it been done twice since 2000. Are you saying they will not win the AL pennant ? They did that 40 times since 1920 (40 out of 90). Are you saying that they will have a losing season ? there have been ten season with more losses than wins since 1920.

there would be points in the season when advancing to the post season was impossible. there would be a point when winning more games than losing games would be impossible.

For yankee futurists there are those who have a good prediction record for future games and those with a track record for predicting the next season and those who are able to understand what the shape of the different sports franchises are.

A Yankee futurist who could only say that the yankee might win or might lose would be considered useless. A Yankee futurist who said the yankee might not do so well in the next season but would not quantify would not be considered useful.

I think it is possible to be more accurate about the future and yes many futures are possible but some are more likely than others and odds for different futures can be produced. Plus there are things with positive and negative impacts on GDP growth and those can be quantified. The age effect may be an effect that will grow from 0 to negative 0.5 to 1% over ten years and to negative 1-1.5% over twenty years. (Not a precise forecast at this point, but I believe that a level of accuracy could be made for each year based on a demographic effect.) This can be countered by different steps and also there positive GDP growth impactors. It appears that high speed rail has a positive GDP impact with a one city effect. Positive 1-1.5% per year with a total 20% boost to GDP with a full buildout that links several cities. A historical analysis of the GDP growth slowdown of Japan and other countries can be compared to places like South Korea which have had less of slowdown. Tracking can be done to see how China is doing relative to the historical comparisons based on comparable levels of per capita GDP and on share of world GDP and share of world exports etc... Futurisms can get closer to being a science by having falsifiable hypothesis and greater accuracy.

Stephen Aguilar-Millan said...

I'm afraid that I know nothing about basketball, so all of the comments about the New York Yankees and pennants is beyond my knowledge.

What I would point to is the difference between subjective probabilities and objective probabilities. Much futures work is in the realms of subjective probabilities (i.e. the outcome is affected by the person making the measurements) which gives it a veneer of objectivity, whereas it is an opinion dressed in numbers.

For this reason, futures aren't a science and any claim to be such is misleading.

Zarathustra said...

I think it should be no surprise that China economy will be as large as the US at some point in future. We have to remember that China now has 4 times as many people as the US, so that if both economies are of the same size, overall the Chinese would still only be 1/4 as rich as the Americans.

I am absolutely worried about the demographics issue. The turn of dependency ratio has some interesting implication. When the size of the cohort aged between 35-54 is the largest within the total population, these people will be those for save and invest for investment. As a result, stock and asset markets are prone to bubble when the size of this cohort peak. That happened in early 1990s in Japan, and in early 2000s in the US. It's going to happen in China soon, and I can't really be totally optimistic.