Chinese Economic Growth

Chinese economıc growth wıll be very hıgh in next decade because of theır production and demostric growth. most of the developed country and the country of European Union are set a policy that ıs reducin expenditure only while Chines policy ıs to increase the the economic growth.

The super-long view inspires some of the most influential forecasts of our time, which

look  back  to  the  overwhelming  economic might  of China  and  India  in  the  seventeenth

century as evidence that they will reemerge as dominant global powers in 2030 or 2050.

In 1600 China accounted for more than one-fourth of global GDP , and India accounted for

just under a  fourth. Though  their shares have  fallen dramatically since  then,  the super-

long  view  skips  past  the  messy  recent  centuries.  The  reasoning  seems  to  be  that

seventeenth-century  performance  offers  some  guarantee  of  future  results.  Sweeping

extrapolation  has  become  a  staple  argument  for  the many  companies,  politicians,  and

high-profile public intellectuals who believe we are entering a Pacific Century or even an

African Century. I recently received a report from a major consulting firm forecasting that

Nigeria could be one of the top-ten economies in the world by 2050. Well, yes, but almost

anything could happen by 2050.

The  total  amount  of  funds  flowing  into emerging-market  stocks  grew  by  92  percent  between  2000  and  2005,  and  by  a

staggering  478  percent  between  2005  and  2010.  Apparently,  for many  investors,  it  is

inspiring to imagine that their investments are well grounded in the remote past and the

distant  future, but  in  the  real world  it  is not practical  for  investors or companies  to  tell

clients to come back and check their returns in forty years. Forecasts are valuable, indeed

unavoidable  for  planning  purposes,  but  it  doesn’t make much  sense  to  talk  about  thefuture beyond five years, maybe ten at the most.

Today we are at a very revealing moment. For the last half century, the early years of

each decade saw a major turning point in the world economy and markets. Each began

with a global mania for some big idea, some new change agent that reshaped the world

economy and generated huge profits. In 1970 the mania was for the top U.S. companies

like Disney, which had been  the “go-go stocks” of  the 1960s.  In 1980  the hot play was

natural  resources,  from  gold  to  oil.  In  1990  it  was  Japan,  and  in  2000  it  was  Silicon

Valley. There were always a  few doubters shouting  from  the wings, warning  that other

changes were overtaking  the  change  agent—that  spiking oil prices will  self-destruct by

strangling the world economy, that a patch of Tokyo real estate can’t be worth more than

the entire state of California, that tech start-ups with zero earnings can’t possibly justify

stock prices in the four figures. But by this point in the mania, there were so many billions

of  dollars  invested  in  the  hot  new  thing  that  few  people  wanted  to  listen  to  the

Cassandras.

The Miracle Year of 2003, The emerging-market mania began with China, which for two decades starting in 1978 grew rapidly, but erratically, anywhere from 4 to 12 percent a year . Then in 1998 China began an unbroken run of growth at 8 percent or more each year , almost

as if the lucky Chinese number 8 had also become an iron rule of Chinese economics.

Starting in the year 2003, an underappreciated turning point in the course of the world,

this good  fortune suddenly spread  to virtually all emerging nations, a class  that can be

defined a number of different ways but here broadly means countries with a per capita

income of less than $25,000. Between 2003 and 2007, the average GDP growth rate in

these countries almost doubled, from 3.6 percent in the prior two decades to 7.2 percent,

and  almost  no  developing  nation  was  left  behind.  In  the  peak  year  of  2007,  the

economies of all but 3 of  the world’s 183 countries grew, and  they expanded at better

than 5 percent in 114 countries, up from an average of about 50 countries in the prior two

decades. The three outliers were Fiji and the chronic basket cases of Zimbabwe and the

Republic of Congo, all exceptions that proved the rule. The rising tide lifted nation after

nation through a series of normally difficult development stages: Russia, to cite the most

dramatic  example,  saw  its  average  annual  income  soar  effortlessly  from  $1,500  to

$13,000 in the course of the decade.

The number of nations  that beat  inflation—containing  the annual  rate of price  increases  to  less  than 5

percent—rose from 16 in 1980 to 103 in 2006. This was the same high-growth and low-

inflation “Goldilocks economy” that America enjoyed in the 1990s, only with much faster

growth and expanded to a planetary scale, including much of the West. It was a chorus of

all nations,  singing  a  story  of  stable high-speed  success,  and many  observers watched

with  undiscriminating  optimism.  The  emerging  nations  were  all  Chinas  now,  or  so  it

seemed.

Former president George W. Bush tells a story about Vladimir Putin that illustrates howcompletely the global economy had been turned on its head. In mid-2011 at a conference

in  the  Bahamas,  I moderated  a  discussion  featuring  President  Bush, who  told  us  that

when he  first met  the Russian  leader  in 2000, Russia was  struggling  to  recover  from a

massive  currency  crisis  and  Putin was  obsessed with  its  national  debt.  By  early  2008,

Russia’s economy was booming, its budget was deep in the black, and the first thing Putin

wanted to talk about was the value of U.S. mortgage-backed securities, which would soon

collapse  in  the  debt  crisis.  Putin’s  focus  had  shifted  180  degrees,  from  cutting Russian

debt  to  enquiring  about  the  risk  of  holding  American  debt,  and  he was  growing  cocky

about Russia’s economic expansion. The Russian leader , who had met Bush’s little terrier ,

Barney, on an earlier visit  to Washington,  introduced his black Lab  to Bush  later  in  the

decade with the remark, “See, bigger, stronger, faster than Barney.”

The  easy money  that  set  the  stage  for  the Great  Recession  of  2008,  by  fueling  the

American housing bubble, still flows freely, now dispensed by central banks attempting to

engineer a recovery to the growth rates of the  last decade, which were not sustainable

anyway. What  is apparent now  is  that while central banks can print all  the money  they

want, they can’t dictate where it goes. This time around, much of that money has flown

into  speculative  oil  futures,  luxury  real  estate  in  major  financial  capitals,  and  other

nonproductive  investments,  leading  to  an  inflation  problem  in  the  emerging world  and

undermining the purchasing power of consumers across the globe. As speculation drives

up oil prices, consumers now spend a record amount of their income on energy needs.

The easy money flows from a sea change in the way the United States sees hard times.

The old view was that recessions were a natural phase in the business cycle, unpleasant

but unavoidable. A new view started to emerge in the Goldilocks economy of the 1990s,

when after many  straight years of  solid growth, people  started  to  say  that  the Federal

Reserve had beaten back  the business  cycle. Under Alan Greenspan and his  successor ,

Ben Bernanke,  the Fed shifted  focus  from  fighting  inflation and smoothing  the business

cycle to engineering growth. Low U.S. interest rates and rising debt increasingly became

the bedrock of American growth, and the increases in total U.S. debt started to dwarf the

increases in total U.S. GDP: in the 1970s it took $1.00 of debt to generate $1.00 of U.S.

GDP growth, in the 1980s and 1990s it took $3.00, and by the last decade it took $5.00.

American  borrowing  was  getting  less  and  less  productive,  focused  more  on  financialengineering and conspicuous consumption.

U.S. debt became  the  increasingly shaky pillar of  the global boom. Low  interest  rates

were driving growth  in  the United States, pressuring central banks around  the world  to

lower their rates as well, while fueling an explosion in U.S. consumer spending that drove

up emerging-market exports. It was no coincidence that the emerging markets began to

levitate  in  mid-2003,  after  aggressive  U.S.  interest-rate  cuts—aimed  at  sustaining  a

recovery  after  the  tech  bubble  burst  two  years  earlier—started  the worldwide  flood  of

easy money, much of which poured  into emerging markets. The  flow of private money

into emerging markets accounted  for 2 percent of emerging-market GDP  in the 1990s—

and jumped to 9 percent of a far higher GDP in 2007.

Now the credit house of cards has collapsed—a casualty of the Great Recession. There

is  much  talk  in  the  West  of  a  “new  normal, ”  defined  by  slower  growth  as  the  big

economies  struggle  to  pay  down  huge  debts.  Real  GDP  growth  in  the  rich  nations  is

expected to fall this decade by nearly a full percentage point, to about 2 to 2.5 percent in

the United States and 1  to 1.5 percent  in Europe and  Japan. What observers have not

realized, however ,  is  that emerging markets also  face a “new normal, ” even  if  they are

not  ready  to accept  that  reality. As growth slows  in  rich nations  they will buy  less  from

countries with  export-driven  economies,  such  as Mexico, Taiwan,  and Malaysia. During

the boom  the  average  trade balance  in  emerging markets nearly  tripled  as  a  share  of

GDP ,  inspiring a new  round of hype about  the benefits of globalization, but  since 2008

trade  has  fallen  back  to  the  old  share  of  under  2  percent.  Export-driven  emerging

markets, which is to say most of them, will have to find a new way to grow at a strong

pace.

This  is  not  just  a  seasonal  shift.  It  is  a  fundamental  change  in  the  dynamic  that  has

driven the rise of emerging markets for several decades now. The basic laws of economic

gravity are already pulling China, Russia, Brazil, and other big emerging markets back to

earth. The first is the law of large numbers, which says that the richer a country is, the

harder it is to grow national wealth at a rapid pace.

China  and many  other  big  emerging markets  are  following  an  export-driven  growth

model similar to those adopted by Japan, South Korea, and Taiwan after World War II. All

these  boom  economies  began  to  slow  from  9  or  10  percent  growth  to  around  5  or  6

percent when  their  per  capita  incomes  reached  upper middle-income  levels, which  the

World Bank defines as a country with a per capita  income of $4,000 or more  in current

dollar terms. Japan hit that wall in the mid-1970s; Taiwan and South Korea hit it over the

subsequent two decades. Note that these are the greatest success stories in the historyof economic development, so they represent the best-case scenario.

Chınese fiscal polıcy was to ıncreasıng theır petr capıta ıncome by ıncreasıng the wages. And they succed ın 2010 when theır per capta ıncome was $4000 whıch ıs near about the middle level economıc country.

For a start, these nations are all over the development map. Russia, Brazil, Mexico, and

Turkey, with average annual incomes above $10,000, have much slower growth potential

than India, Indonesia, or the Philippines, whose average incomes are well under $5,000.

But high  incomes do not necessarily  translate  into  technological strength: Hungary  is  in

the same income class as Brazil and Mexico, but 90 percent of Hungarians have access to

mobile communications, compared with only 40 percent of Brazilians and Mexicans.

The debt loads of emerging markets vary widely—even recent success stories like China

and South Korea carry as heavy a burden of personal and business loans, relative to GDP ,

as many  troubled  developed  countries.  The  typical  South  Korean  has more  than  three

credit cards and carries debts  larger  than  the average annual  income, while  fewer  than

one in three Brazilians has even one card.

Not All Trees Grow to the Sky

There  has  also  been  a  halt  to  the  reforms  that  set many  developing  countries  on  the

“emerging” path  in  the  first place. After Deng Xiaoping began experimenting with  free-

market reform in the early 1980s, China went on to launch a “big bang” reform every four

to five years, and each new opening—first to private farming, then to private businesses,

then  to  foreign  businesses—set  off  a  new  spurt  of  growth.  But  that  cycle  has  run  its

course.

Since 1950, on average only one-third ofemerging markets have been able to grow at an annual rate of 5 percent or more. Less than  one-fourth  have  kept  that  pace  up  for  two  decades,  and  one-tenth  for  three decades.  Just  six  countries  (Malaysia,  Singapore,  South  Korea,  Taiwan,  Thailand,  and Hong Kong) have maintained this rate of growth for four decades, and two (South Korea and Taiwan) have done so for five decades. Indeed, in the last decade, except for China and India, all the other countries that managed to keep up a 5 percent growth rate, from Angola to Tanzania and Armenia  to Tajikistan, are new  to  this class. In many ways  the “mortality rate” of countries is as high as that of stocks. Only four companies—Proctor & Gamble, General Electric, AT&T, and DuPont—have survived on  the Dow Jones  index of the top-thirty U.S. industrial stocks since the 1960s. Few front-runners stay in the lead fora  decade, much  less many  decades,  and  identifying  those  few  is  an  art  rather  than  a science.

The  subsequent  decades  saw growth  that  was  either  unusually  weak  or  unusually  strong:  In  the  1980s  and  1990s, growth in emerging markets averaged only 3.5 percent, weighed down by the collapse of the Soviet Union and serial financial crises in countries ranging from Mexico to Thailand to Russia. That was followed by the liquidity-fueled, turbocharged boom of the last decade, which  is  now  unraveling  as  the  cost  of  funding  growth  rises.  Once  a  financial  soufflé collapses, it can only rise again once memories of the collapse fade. Given the depths of the Great Recession of 2008, however , another debt binge  is extremely unlikely  in  the

next decade.The  return  of  emerging-market  growth  rates  similar  to  those  in  the  1960s  does  not

imply  a  revival  of  the  image  of  the  “Third  World, ”  consisting  of  uniformly  dark  and

backward nations at  the bottom of  the heap and destined  to stay  that way. During  the

1950s  and  1960s  the  biggest  emerging markets—China  and  India—were  struggling  to

grow at all. Nations like Iran, Iraq, and Yemen put together long strings of strong growth,

but those runs came to a violent halt with the outbreak of war , and these countries are

now more  closely  associated  with  conflict  than  finance.  The  chaos  overshadowed  the

takeoff in places like South Korea and Taiwan, both of which were largely unrecognized in

their  early  years. While  there  are  no  reliable  growth  data  on  emerging markets  from

before 1950, the available evidence suggests that never have so many nations grown so

fast for so long as they did in the last decade. Yet today analysts are still looking for this

miracle of mass convergence to happen all over the globe.

Meanwhile, scores of “emerging” nations have been emerging  for many decades now.

They have failed to gain any momentum for sustained growth or their progress has begun

to stall since they became middle-income countries. Malaysia and Thailand appeared to

be on course  to emerge as  rich nations until  the crony capitalism at  the heart of  those

systems caused a financial meltdown in the crisis of 1998. Their growth has disappointed

ever since.  In  the 1960s,  the Philippines, Sri Lanka, and Burma were billed as  the next

East Asian tigers, only to see their growth falter badly, well before they could reach the

“middle-class” average income of about $4,000. Failure to sustain growth is the general

rule, and that rule is likely to reassert itself in the coming decade.

These  stars  are  the  breakout  nations,  by which  I mean  the  nations  that  can

sustain  rapid  growth,  beating  or  at  least matching  high  expectations  and  the  average

growth  rates of  their  income  class;  for a nation  like  the Czech Republic,  in  the  income

class of $20,000 and more, breaking out will mean 3 to 4 percent growth in GDP , while

for China, in the class of $5,000 and less, anything less than 6 to 7 percent will feel like arecession.One  of  the  great  economic  stories  of  the  century  is  largely  overlookbecause  the European Union  is widely  spoofed as an  “open-air museum” and  in  late 2011  is  in  the throes of a severe debt crisis. But the EU is also a stabilizing model and still an inspiration for  some  new members,  particularly  Poland  and  the Czech Republic, which  are  in  that rare  class  of  nations  poised  to  break  through  and  join  the  ranks  of  the  rich  elite. Not every little EU member is a Greece.

The main rule for identifying breakout nations is to understand that economic regimes—

the  factors driving growth  in any given country at any given  time—are  in constant  flux.

Different  operating  rules  apply  in  different  nations,  depending  on  rapidly  changing

circumstances. Economic  regimes are  like markets. When  they are on a good  run  they

tend to overshoot and create the conditions for their own demise. Popular understanding

tends to lag well behind the reality: by the time a regime’s rules have been codified by

experts  and  hashed  over  in  the  media,  it  is  likely  already  in  decline.  That  dynamic

underpins Goodhart’s  law (a cousin of Murphy’s  law), coined by  former Bank of England

adviser  Charles  Goodhart:  once  an  economic  indicator  gets  too  popular ,  it  loses  its

predictive value.

In a period of impending change, like this one, with the painful ending of a golden age

of easy money and easy growth, it is typical for people to cling to dated ideas and rules

for too long, particularly notions that minimize or explain away potential risks. The most

dramatic recent example is the idea that the basic tools of economic stimulus—lowering

interest  rates  and  raising  public  spending—can  end  a  business  cycle,  not  only  in  the

United States but also in the developing world. In the emerging markets, there has long

been a disturbing tendency among leaders to take credit for boom times and blame bad

times  on  the West:  that  phenomenon was widespread  in  late  2011,  as many  leaders

attributed any slowdown in emerging markets to contagion from Europe, forgetting that

lending from European banks was a key driver of the boom in the first place.

Another  dated  idea  is  the  rise  of  demographic  analysis  as  a  financial-consulting

industry. Because China’s boom was driven  in part by a particularly  large generation of

young people entering the workforce, there is now a small army of consultants who scour

census  data  looking  for  similar  population  boomlets  as  an  indicator  of  the  next  big

economic miracle. These forecasts often assume that these workers have the necessary

education and skills to be employable, and that governments will find gainful employment

for them. In a world where a rising tide was lifting all economies, this made brief sense,

but economic conditions will change.

One way or another all the rules flow from understanding the current economic regime—recognizing  the  pace  of  change;  determining  whether  it  is  moving  in  productive  or

destructive directions, and whether it is creating balanced growth across income classes,

ethnic groups, and  regions, or precarious  imbalances.

It’s also not  just a nasty shock  for European  tourists  that everything  from a Bellini  (a peachy champagne brunch cocktail) to a taxi ride feels like it costs a fortune in Rio: it’s a symptom  of  the  overpriced Brazilian  currency,  the  real,  and  of  the  general  rule  that  a cheap currency is a sign of competitive strength. Brazil’s economy has gotten a bit fat and slow, even as hot money-flows rendered the real overpriced and uncompetitive. So that expensive  Bellini  is  not  only  a  sign  of  weakness  for  Brazil,  it’s  a  sign  of  strength  for competitors,  even  of  potential  revival  in  Detroit,  as  the  United  States  regains competitiveness against major emerging markets. After  falling  in value by a  third since 2001 versus the currencies of its major trading partners, by mid-2011 the U.S. dollar was at its cheapest inflation-adjusted rate since the early 1970s.

Over  the  last  decade  several major  emerging-market  currencies  have  risen  against  the  dollar—none more  than  the  Brazilian  real— which  is  the main  reason why  the  long-term decline  in  the U.S. share of global exports bottomed out  in 2008 at 8 percent and has since been  inching higher . U.S. dependence on foreign energy has steadily fallen from 30 percent a decade ago to 22 percent today, owing  to new discoveries of oil and gas  trapped  in  shale  rock and  the development of new  technologies  to  extract  it.  The  United  States  has  now  overtaken  Russia  as  the number one producer of natural gas, and could reemerge as a major energy exporter in the  next  five  years.  Basic  American  strengths—including  rapid  innovation  in  a  highly competitive market—are  producing  the  revival  of  its  energy  industry  and  extending  its lead  in  technology;  all  the  hot  new  things  from  social  networking  to  cloud  computing seem  to  be  emerging  once  again  from  Silicon  Valley  or  from  rising  tech  hotspots  like Austin,  Texas.  As  some  of  the  big  emerging  markets  lose  their  luster  over  the  next sdecade, the United States could appear quite resilient in comparison.