Why One Forecaster Sees a ‘Long, Soft Fall’ for China

China reported on Tuesday that its economic growth fell to a five-year low. But one forecaster says that’s just the beginning. This week the Conference Board issued a 75-page white paper predicting that China’s annual growth will dip below 4 percent in the next decade. Its title: The Long Soft Fall in Chinese Growth.

I met on Monday with the report’s authors, David Hoffman and Andrew Polk, and asked why they’re so pessimistic on China. They said it’s a straightforward projection of recent slowdowns in the growth of capital investment, labor productivity, and the quantity and quality of the labor force.

It’s the optimists who need to defend their case, according to Hoffman, because the only way to project continued 7 percent growth for China is to project major output-enhancing economic reforms. “We just don’t think that will happen,” says Hoffman, who manages the Conference Board China Center for Economics and Business in Beijing.

The reforms that would allow China to keep growing faster are difficult for the leadership, Hoffman says, and include bringing credit markets under control, “marketizing” state-owned enterprises so they can fail if they mess up, and extricating government from involvement in private business.

The Conference Board “early on identified a number of deeply rooted risks and imbalances that could trigger a deep structural slowdown and compel major policy reorientations,” the report says. It predicts that growth will gradually slow down through 2019 and then settle at around 3.9 percent annually after 2020.

Hoffman and Polk, the center’s resident economist, also pointed me to an August report by Harry Wu, a senior adviser to the Conference Board’s China Center. It says the Chinese government has significantly overstated its productivity growth. Total factor productivity growth was negative from 1952 to 1977 at -0.5 percent a year, and grew to 1 percent a year from 1978 to 2012, Wu says. The official numbers for the two periods, both positive, are 0.1 percent and 3.2 percent, respectively.

Total factor productivity is the extra output that countries achieve through innovation and better management, holding constant the inputs of labor and capital. Wu’s point is that almost all of China’s output increase came from using more labor and equipment, not from using it better.

Hoffman says that although Wu’s paper doesn’t represent the official position of the Conference Board, “It’s excellent work—as good as can be done given the data issues.” The Conference Board is an independent business membership and research organization operating worldwide.

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