China’s economy: Size matters

If you’re tired of the typical doom and gloom being written about the Chinese economy, you might want to look at what Noah Smith is saying over at Bloomberg Views.

This assistant professor of finance at Stony Brook University in New York writes that while a permanent Chinese slowdown is possible, it’s highly unlikely. Though the country is experiencing the bursting of a land price bubble, combined with vast industrial overcapacity, he thinks China has a lot more room to grow.

He said “the country’s per capita gross domestic product, measured in purchasing power parity terms, is still only about $13,000. Japan, in contrast, stands at about $38,000 and South Korea at more than $35,000.” Smith finds it unlikely that the average Chinese person would max out at just one-third as productive as a Japanese or Korean person.

He points to two big reasons for believing China has a longer road to run. First, is its huge size. “A large, dense market gives rise to agglomeration effects, where companies want to locate near to consumers, and consumers — who are also workers — want to live near their employers.”

Smith also likes that China is open to foreign technology. And while a significant part comes from stealing from competitor nations, some of it comes from reverse engineering to create their own products.

And while the authoritarian government will eventually limit the country’s potential for growth, China could see GDP reach 70% of the levels seen in Japan and South Korea.

He points to two economists at the Federal Reserve Bank of St. Louis who have found that if China reaches South Korean levels of income, it will grow robustly throughout the 2020s and then slow down.

Based on this Smith expects this economic downturn to be a minor stumble with growth returning to 7%. He says the “country has one big run left in it” and expects it to last for much of the 2020s.



Categories: Asia Unhedged

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