Doom and gloom outlooks on China are too heavily based on misconceptions, blinding analysts to the country’s potential for massive growth down the road, economist Nicholas R. Lardy says.
While many pessimists have by now dismissed China’s ability to return to the rapid expansion it enjoyed in pre-pandemic decades, the Peterson Institute senior fellow disagrees:
“China overcame even greater challenges when it started on the path of economic reform in the late 1970s. While its growth has slowed in recent years, China is likely to expand at twice the rate of the United States in the years ahead,” Lardy wrote in Foreign Affairs on Tuesday.
He notes that although China’s 2023 GDP expansion appears meager to the double-digit growth it achieved in prior years, pessimists are thinking this means that China’s falling behind the US economy.
China’s nominal GDP grew 4.6% last year, surpassed by a 6.3% rise in the US. But this changes when adjusting for each country’s inflation, or — in China’s case — disinflation, Lardy said. In that case, China’s GDP outpaced the US, with each country expanding 5.2% and 2.5%, respectively.
Misconceptions around growth also come from the fact that Washington has aggressively tightened interest rates since 2022, while China has done the opposite, Lardy said. That depressed China’s yuan, eroding the value of its GDP when measured in dollars.
But with US policy likely to ease soon, the yuan is set to appreciate in the near-term, Lardy added: “Its nominal GDP measured in U.S. dollars will almost certainly resume converging toward that of the United States this year and is likely to surpass it in about a decade.”
Lardy aruges that China bears are also mistaken about internal spending in the country, with many worried that consumers and businesses have prioritized savings above all else.
Instead, he notes that household consumption overtook income last year, while Chinese companies ramped up debt, and increased investment in manufacturing, mining, utilities, and services.
Meanwhile, many are not entirely wrong to fear an investment collapse in China’s massive real estate sector, though this is overblown, Lardy wrote. For instance, although a dramatic pullback in housing starts since 2021 has occurred, it’s not because money is fleeing.
Instead, developers have turned greater attention towards housing project completions, encouraged by government policy.
Others have also called out China’s crackdown on private companies as a headwind for growth, arguing that it’s forced private investment to dry up and entrepreneurs to leave the country, Lardy said.
“Almost all the decline in the private share of total investment after 2014 resulted from a correction in the property market, which is dominated by private companies,” he wrote. “When real estate is excluded, private investment rose by almost ten percent in 2023. “
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