Don’t Bet on the End of China’s Growth Miracle

Employees work on a solar panel production line at Shenzhou New Energy Co., Ltd in Lianyungang, China Photograph by ChinaFotoPress via Getty Images

In 2011, China’s economy grew 9.2 percent, compared with 10.4 percent in 2010. In the second quarter of 2012 that growth rate had fallen further, to 7.6 percent. That’s set alarm bells ringing about the fate of the China miracle. Will the most successful and rapid decline in global poverty in the history of humanity shudder to a halt? Will the Asian Century be postponed, leaving the U.S., against the odds, as the undisputed top nation for the foreseeable future?

Don’t bet on it. There are still strong reasons to believe fast growth remains possible for China during the next two decades. And even if its growth were to collapse by 2 or 3 percentage points a year, the country will still get rich awfully fast.

China has grown at a little more than 8 percent a year for more than thirty years. Can it manage the same trick for another decade or two? In the early 1990s, economists Bill Easterly, Michael Kremer, Lant Pritchett, and Larry Summers—with research support from Sheryl Sandberg—wrote a paper on the drivers of long-term growth. It pointed out that strong growth performance in one decade was absolutely no guarantor of fast growth the next. In fact, there was almost no relationship between country growth rates over time. Just as with mutual funds, past performance did not guarantee future success.

The paper, titled “Good Policy or Good Luck?” concluded that growth “miracles” were, in fact, largely good luck. Of course, a few lucky countries bucked the reversion to mean and expanded decade after decade—most notably the original East Asian Miracle economies such as Hong Kong. And, so far, the Chinese mainland has followed in their footsteps.

The question is whether the roll will continue. Chinese industry is operating at only two-thirds full capacity, inventories of unsold goods are rapidly expanding, and measures such as electricity production suggest the slowdown may be more dramatic than official gross domestic product statistics suggest. Increased lending over the past few years during a period of slower growth might be a sign of lower returns to investment—perhaps related to evidence of real estate bubbles in a number of Chinese cities.

There are fears that China’s biggest banks are carrying (although not yet reporting) a growing stock of bad debt, feeding into longer-term concerns that the country is due for a full-on banking crisis. Japanese officials warn that the Chinese banks may be propping up an increasing number of “zombie companies,” throwing good money after bad thanks to political pressure.

Raghuram Rajan, former economic counselor at the International Monetary Fund and now India’s chief economic adviser, noted (PDF) that over the longer term, China needs to move away from a model based on export-led growth, which means increasing domestic demand. In turn, that would mean reducing the savings rate from its current level of about half of GDP and abandoning an artificially low exchange rate to allow the renminbi to float. Zhu Min, deputy managing director of the IMF, even argued earlier this year that a slowdown would be helpful to China because it would give Beijing space to move to that new model.

Yet, even absent deep structural reforms, there’s a strong likelihood that China’s economy will maintain high levels of growth for the foreseeable future. Economic historian and Nobel laureate Robert Fogel argues (PDF) there is certainly the potential for China to continue growing at 8 percent until 2030. Despite an aging (PDF) population, there are still opportunities for more adults to work. And more of that labor will likely move into more productive sectors over time—out of agriculture and into manufacturing and services. These two factors alone could account for 30 percent of the country’s continued growth, Fogel suggests.

There are also considerable opportunities to increase labor productivity through education. From 1990 to 2004, China’s college enrollment rate increased sixfold—but it’s still far behind Western levels, so there’s room for continued improvement. And, at least in Shanghai, the schools are pretty good: The city’s scores in the Program for International Student Assessment of 15-year-olds in math, science, and reading were higher than the average for any country tested. Meanwhile, 18 Chinese universities made it into a list of the world’s top 500 (in a compilation by Shanghai University, which might be biased, of course). If China achieves universal secondary enrollment, and by 2025 reaches levels of college and university enrollment achieved by Western European nations in the 1980s, that might add more than 6 percent to growth rates, according to Fogel.

There are, of course, many plausible reasons why the rosier projections won’t come to pass. But it’s worth noting that even the more pessimistic forecasts of China’s long-term potential would be considered hopelessly optimistic for most countries. In 2010, the Asian Development Bank projected that China might grow at a 5.5 percent average during the two decades to 2030, and if it improves education, research, and property rights, that might climb to 6 percent.

Former IMF economist Arvind Subramanian points out in his book Eclipse that if China’s income growth did slow to 5.5 percent, that would still mean China’s income per capita (at purchasing power parity) would be around $33,000 by 2030—up from around $11,000 in 2010 and about the same as current per-capita income in the European Union. That would mean the Chinese economy will be about twice the size of the U.S. economy in 2030. So, even with a slowdown, the Asian Century looks like a foregone conclusion.

    Before it's here, it's on the Bloomberg Terminal.