Taps Coogan – September 1st, 2023

The writing has been on the wall for years: China is facing demographic headwinds, its debt fueled & state directed real-estate development economic model is tapped out, and it is backsliding on the Deng Xiaoping era market reforms that enabled its rise. Despite that, the narrative of a forever-rising China has remained remarkably durable.

That may finally be changing, as Mohamed El-Erian, Allianz Chief Economic Advisor and Queen’s College President, discussed with Bloomberg:

El-Erian on whether China has the right policy mix:

“No. What they’re doing is piecemeal… They’re not gaining traction. In fact, if anything they are exposing inconsistency within the economy. The problem with China is a growth problem and a debt problem and the growth problem needs a revamped growth model not just tinkering with what you have… and the debt issues need fundamental restructuring, otherwise pockets of indebtedness will become systemic…”

On China’s ‘credibility’ in addressing economic problems:

“In the past, every time China hit a rough patch there was a lot of learning and a lot of course corrections. This time around, it’s been a different process and that’s why the markets haven’t given full benefit for the measures. Even today, we saw the benefits (of a policy announcement) fade very quickly. Last week, it was about the stock market measures. That faded very quickly. So the market is now starting to doubt that China can deliver in a consistent fashion.”

Better late than never.

As far as yours truly is concerned, the narrative on China has long been wrong. What has actually happened is that China has moved from a very low GDP-per-capita country under Mao to a middle income country with GDP-per-capita near the global average today: slightly higher than Mexico but below Bulgaria. Now that they have reached middle-income status, their growth has decelerated to mid single digits, equivalent again to Mexico.

Claims that China has seen the fastest growth on record are exaggerated. As we’ve noted before, according to official Chinese GDP figures, China claims that it was the 12th poorest country in the entire world in 1980 (per capita GDP). China claims that its per capita GDP was less than that of Burkino Faso, Malawi, Laos, Angola, a third lower than that of Sudan, and 78% lower than that of Papua New Guinea. While China was undoubtedly very, very poor in 1980, it probably wasn’t vying with Sub-Saharan countries in the midst civil wars for the title of poorest country on the planet.

The difference that underestimating the past makes is massive. According to China’s official numbers, its per capita GDP has increased 4,687% since 1980, the second biggest increase in the world (after the Maldives). If however, China was only as poor as neighboring Laos in 1980, its growth number since 1980 plunges by more than half. Put differently, half of China’s growth (in percentage terms) in the last 40 years can be explained by getting to the level of poverty of Laos in 1980.

People widely recognize that China exaggerates its GDP through a range of strategies and yet everyone still uses Chinese GDP figures At the end of the day, people will use the official figure, even if they know that it is wildly wrong, because it is the official figure.

What makes China’s experience unique is their massive population. That population meant that even a move to middle income has made them the second largest economy in the world, the largest exporter, and influential. However, China’s population is now shrinking and thanks to a fertility rate that is even lower than in Japan, China is a going to age and shrink at a rapid pace in the coming decades. In the next 25 years, its population will likely shrink by over 110 million people, nearly the population of Mexico, and the preponderance of that shrinkage represents working age people.