Revising China’s Rise Down

[3] See, for example, Yuen Ang (2021) on how China’s “common prosperity” doctrine reflects an uncertain attempt to tame the excesses of Chinese capitalism in “Can Xi End China’s Gilded Age?” », Project Syndicate, September 21, 2021, https://www.project-syndicate.org/commentary/xi-china-gilded-age-crackdown-on-corruption-by-yuen-yuen-ang-2021-09; and Rhodium Group (2021) on recent trends in anti-market policies in Daniel H. Rosen, Thilo Hanemann, Rachel Lietzow, Ryan Featherston, Josh Lipsky and Niels Graham, “China Pathfinder: Annual Scorecard”, Rhodium Group, October 5, 2021 , https://rhg.com/research/china-pathfinder-2021/.
[5] The PWT 10.0 economic database and the widely used Conference Board Total Economy Database downgrade China’s GDP and growth figures, arguing that official statistics overestimate them. Among recent studies, Chen et al (Wei Chen and Xilu Chen, “A Forensic Examination of China’s National Accounts”, Brookings Institution, Spring 2019, https://www.brookings.edu/wp-content/uploads/2019/03 / ChenEtAl_web.pdf) notes that China’s GDP is overestimated in official statistics. Other recent studies, however, suggest that the official GDP figures are not substantially overestimated (Carsten A. Holz, “The Quality of China’s Statistics”, China Economic Review(30), 2014, 309-338, https://carstenholz.people.ust.hk/CarstenHolz-QualityChineseGDPStatistics-25Apr2015.pdf) or could be underestimated (Hunter Clark, Maxim Pinkovskiy and Xavier Sala-i-Martin, Chinese GDP growth may be underestimated, NBER, (Massachusetts: National Bureau of Economic Research, April 2017), https://www.nber.org/papers/w23323). Finally, Fernald et al (John Fernald, Eric Hsu and Mark M. Spiegel, “Is China Fudging its Figures? Evidence from Trading Partner Data”, Federal Reserve Bank of San Francisco, September 2015, https://www.frbsf.org /economic-research/files/wp2015-12.pdf) suggest that China’s GDP statistics have improved in accuracy over time.
[10] Nicholas Lardy of the Peterson Institute says that “China’s potential growth for a considerable period into the future is faster than the 6-7% rate seen in recent years.” See Nicholas R Lardy, The State Strikes Back: The End of Economic Reform in ChinaPeterson Institute for International Economics, (New York: Columbia University Press, 2019), https://www.piie.com/bookstore/state-strikes-back-end-economic-reform-china.
[11] Lant Pritchett and Lawrence H. Summers, Asiaphoria meets regression to the meanNBER, (Massachusetts: National Bureau of Economic Research, October 2014), https://www.nber.org/papers/w20573.
[12] See Appendix A1 for the full list of existing studies and how these compare to the baseline projections of this study.
[18] See the appendix for more details.
[19] Based on estimates from Richard Herd, “Estimating Capital Formation and Capital Stock by Economic Sector in China: The Implications for Productivity Growth”, Policy Research Working Paper, No. 9317, World Bank, Washington, DC, 2020, https:/ /openknowledge.worldbank.org/handle/10986/34126.
[20] Wang Jing, Chen Bo, Yu Ning, Zhu Liangtao, Wang Juanjuan, Zhou Wenmin and Denise Jia, “How Evergrande Could Turn Into ‘China’s Lehman Brothers’”, Caixin Global, September 20, 2021, https://www.caixinglobal. com/2021-09-20/cover-story-how-evergrande-could-turn-into-chinas-lehman-brothers-101775596.html.
[21] These include Dalian Wanda, HNA, Anbang Insurance, Baoshang Bank and Huarong.
[23] See the appendix for more details.
[32] Holding constant the other key assumptions we make for our baseline projection.
[33] The Economist summarizes China’s current policy agenda as consisting of industrial modernization (e.g. aiming for a constant share of manufacturing in GDP, encouraging the adoption of industrial robots), better urbanization (e.g. hukou reform, smart cities and the creation of urban mega-clusters such as the Greater Bay Area), and various reforms aimed at improving efficiency (e.g. in education, financial regulation, bankruptcy law, etc. ). See “China’s future economic potential depends on its productivity”, The EconomistAugust 14, 2021, https://www.economist.com/briefing/2021/08/14/chinas-future-economic-potential-hinges-on-its-productivity.
[34] See Nicolas Lardy, Markets Above Mao: The Rise of Private Business in China, Peterson Institute for International Economics, (Washington: Columbia University Press, September 2014), https://www.piie.com/bookstore/markets-over-mao-rise-private-business-china; as well as Adam Tooze’s interesting article on a 1983 World Bank report foreshadowing China’s growth potential, “China in 1983, a Miracle Waiting to Happen?”, Chartbook, July 25, 2021, https:/ /adamtooze.substack.com/p/adam-toozes-chartbook-28-china-in.
[35] See, for example, Loren Brandt, John Litwack, Elitza Mileva, Luhang Wang, Yifan Zhang and Luan Zhao, “China’s Productivity Slowdown and Future Growth Potential”, Policy Research Working Paper No. 9298, World Bank, Washington, DC, 2020, https://openknowledge.worldbank.org/handle/10986/33993). Herd (2020) also shows that productivity growth has been higher in the business sector, but has nevertheless also slowed down over the past decade.
[39] Daniel Rosen, “The Economic Calculation of China”, Foreign Affairs, July/August 2021, https://www.foreignaffairs.com/articles/china/2021-06-22/chinas-economic-reckoning; Lardy, The state strikes back, 2019, https://www.piie.com/bookstore/state-strikes-back-end-economic-reform-china; David Orsmond, China’s economic choices, Lowy Institute, Analysis, (Sydney: Lowy Institute, December 17, 2019), https://www.lowyinstitute.org/publications/china-s-economic-choices; “China’s Economic Growth and Rebalancing and the Implications for the Global and Euro Area Economies”, European Central Bank, 2017, https://www.ecb.europa.eu/pub/pdf/other/ebart201707_01.en.pdf.
[41] Roland Raja, Decoupling from East Asia, Lowy Institute, Research Note, (Sydney: Lowy Institute, January 23, 2019), https://www.lowyinstitute.org/publications/east-asia-s-decoupling#_ednref3; Hung Tran, “Decoupling/Reshoring versus Dual Circulation,” Atlantic Council Issue Brief, April 2021, https://www.atlanticcouncil.org/wp-content/uploads/2021/04/Decoupling_Reshoring_versus_Dual_Circulation.pdf.
[42] Takatoshi Sasaki, Tomoya Sakata, Yui Mukoyama and Koichi Yoshino, “China’s Long-Run Growth Potential: Can Productivity Convergence Be Sustained?” », Bank of Japan, June 30, 2021, https://www.boj.or.jp/en /research/wps_rev/wps_2021/data/wp21e07.pdf; and Orsmond, China’s economic choices2019, https://www.lowyinstitute.org/publications/china-s-economic-choices.
[46] W Baumol and W Bowen, “On the performing arts: the anatomy of their economic problems”, The American Economic Review, (55)1/2, 1 Mar 1965, 495-502, https://www.jstor.org/stable/1816292); and William Nordhaus, Baumol’s diseases: a macroeconomic perspectiveNBER, (Massachusetts: National Bureau of Economic Research, 2006), https://www.nber.org/system/files/working_papers/w12218/w12218.pdf).
[48] This is the approach taken, for example, in Jeannine Bailliu, Mark Kruger, Argyn Toktamyssov and Wheaton Welbourn, “How Fast Can China Grow? The Middle Kingdom’s Prospects to 2030”, Bank of Canada, April 2016, https://www.bankofcanada.ca/2016/04/staff-working-paper-2016-15/; and Innovative China: new engines of growthWorld Bank, State Council Development Research Center, People’s Republic of China, (Washington, DC: World Bank, 2019), https://openknowledge.worldbank.org/handle/10986/32351.
[49] For example, Yu Huang, Marco Pagano and Ugo Panizza, “Local Crowding-Out in China”, The Journal of Finance(75)6, 2855–2898, 2020, https://onlinelibrary.wiley.com/doi/abs/10.1111/jofi.12966, document evidence of higher levels of local public debt crowding out local private investment.
[50] Following the classic investment accelerator effect linking the rate of investment to the speed of economic growth.
[51] See for example, Takatoshi Sasaki et al, “China’s Long-Term Growth Potential”, 2021, https://www.boj.or.jp/en/research/wps_rev/wps_2021/data/wp21e07.pdf; and Longmei Zhang, Ray Brooks, Ding Ding, Haiyan Ding, Hui He, Jing Lu, and Rui Mano, “China’s High Savings: Drivers, Prospects, and Policies,” International Monetary Fund, December 11, 2018, https://www. imf.org/en/Publications/WP/Issues/2018/12/11/Chinas-High-Savings-Drivers-Prospects-and-Policies-46437.
[52] Note that faster productivity growth would also increase the contribution of investment to growth, thereby reducing the required total increase in productivity growth needed to achieve a higher overall economic growth rate.
[55] This follows the well-documented Penn Effect that price levels tend to be higher in rich countries. See, for example, Yin-Wong Cheung, Menzie Chinn and Xin Nong, Estimating Currency Misalignment Using the Penn Effect: It’s Not as Simple as It SeemsNBER, (Massachusetts: National Bureau of Economic Research, August 2016), https://www.nber.org/system/files/working_papers/w22539/w22539.pdf.
[56] The West here includes the United States, the 27 members of the European Union, Japan, the United Kingdom, Canada and Australia.

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