Senior Economists: China to Surpass by 2025 – Me: HOW?

Friday, March 21, 2008 8:53
Posted in category The Big Picture

I am a big believer in China.  BIG…. but, even I have my limits.

Last week while attending a discussion at Three on the Bund, Economist Jeffrey Sachs said that China’s GDP would pass the United States by 2030.  According to him, that would mean that China (currently about the same size as Germay) would need to grow 4-6 times its current size.

Then, while following a paper trail of articles, I bumped into this PWC press release where  John Hawksworth, head of macroeconomics at PricewaterhouseCoopers LLP says:

Our latest projections suggest that China could overtake the US in around 2025 to become the world’s largest economy and will continue to grow to around 130% of the size of the US by 2050.

At the discussion, I asked Professor Sachs (A man whose work in poverty alleviation and country building is amazing), just how this would be possible when the country is already running out of coal, water, petro… is trying to control inflation… is having a hard time with depleting agricultural land…

These are all topics I have written about through previous posts.

At the core of their assumptions are that they could overcome the hurdles we have been discussing at the What if, What Else, and What are the odds sessoins for

in essence, if China is already experiencing growing pains at this size, what would the curve begin to look like when growing 6 times in around 15 years.

It was a question that I unfortuantely didn’t get an answer to, and it is one that no doubt planners in Beijing are grappling with as well.  So, what do you think?  What will the curves look like as demand for raw materials increases by a factor of 2, 3, or more?

Is it physically possible for China to acquire and process goods at that level, or are we looking at a meltdown?

More importantly, could this all be done without leveling all the mountains and drying up all the rivers?

Personally, I don’t think it can.  I think that China is still in a position to achieve an amazing amount of growth, but with raw material shortages occuring on a frequent basis now (coal and petro) and rising prices already pincing consumers, I think that China’s curve is already sloping at a non-liner angle and that i will only continue to grow steeper.

Of course, that is just my opinion.  What is yours?

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11 Responses to “Senior Economists: China to Surpass by 2025 – Me: HOW?”

  1. Siyan shopgirl's shanghai says:

    March 21st, 2008 at 3:58 pm

    Interesting, would love to have been there to listen to him, but he doesn’t seem to consider the Solow-model. Sure China is converging against the US, but when China has a certain amount of capital och certain high quality of lifestyle to its people, it will be much harder for China to store that situation while developing so rapid as it does now, at the same time.

    anyhow, what do I know? Let’s see in 2030 😉

  2. Falen says:

    March 21st, 2008 at 7:01 pm

    China has always conduct their reforms on shifting sands. Not to understate the problems but the government has demonstrate enormous capacity to deal with problems as well. Remember the whole China banks with their “non-performing loans” and how China is not up the same standards as western institution in risk assessments? That was old news by 2005 already and guess what’s the news in 2007/2008. Ironic how the supposed rigorous western risk assessment turn out to be nothing but black magic used as a license to print money.

    You might ask the same question as to how US is able to grow at 3% perpetually, which is almost always used by economist when the “China surpass US” predictions are raised. Oil price are going way over 100 and dollar is going to continue to weaken. Furthermore interest rate has to keep lowering to stave off the credit crunch. How long can the financial wizards keep the lid on the massive inflation that is about to explode?

    I hope the 600 dollar rebate check is going to help…

  3. Levin says:

    March 21st, 2008 at 7:08 pm

    It’s simple. China just hold down US with a choke hold to ensure that US will shrink, China then invade US to grab all the coal, iron and oil from the US. While US shrinks and China grows, it is easy to surpass US.

  4. Rich says:

    March 22nd, 2008 at 9:25 am

    Shopgirl,

    You have picked one out of the hat with Solow!

    Not sure we need to wait until 2030 to see as thinkings like coal and petro are seeing price increases that are going to cause instability in the market short term.

    With regard to Solow, I had to google it to refresh myself (link to Solow model here). I recognize the charts from my Econ classes, but I’ll need some time to process.

    I was speaking to a banker this evening about the likelihood of China reaching this target, and he took a different point. that if china started burning off its reserves to put in a health care system, and Chinese consumers started buying U.S. products, that it could grow more sustainably at the expense of the U.S.

    I see his logic, but my concern (particularly with the second point) is that it is just not sustainable. Eventually the USD would swing back.

    Investing the healthcare and education though are no brainers, and if the average Zhou felt secure about their future, and the future of their children, they would be more likely to spend.

    But.. again.. where do the materials come from?

    Thanks for stopping in.

    R

  5. Rich says:

    March 22nd, 2008 at 9:31 am

    Falen,

    I would agree that there is a general doubel standard in the market when it comes to wise old white guys telling others what to do… and those same white guys not taking their own advice.

    But… do you really think those NPLs have gone away?

    I will also agree that Beijing has done an amazing job of managing the affairs of the people. Getting back to my earlier post this week, China has seen a fair amount of problems and it will continue to…

    Back to the topic at hand though, perhaps someone will run a model that has the U.S. going -3% and china +8% for 5 years to see how much the gap closes. I have no doubt that the gap would close, but would it provide much of a gain? I dunno…

    more importantly (in my myoptic mind) is where the materials come from. for China to grow 4 times (and lets assume U.S. contracts 10%), they still need to find a load of new material to continue their growth…. and I am guessing that without those materials, they are in big trouble no matter what happens in the US.

    R

  6. Adam says:

    March 23rd, 2008 at 5:43 am

    If US contracts 10%, can China really carry on growing at all? So much of China’s growth is dependent on trade (and if the US contracts 10% so will many of the OECD countries). Although Chinese domestic consumption is growing and the reliance of China’s growth on trade will start to decrease as China’s costs increase relative to other countries, this reliance will not shrink quickly. As soon as a (global /US) recession kicks in then there will be a lot of unemployed and unhappy people in the Deltas… the knock-on effects, socially, will be tremendous in China.

    I think the US can survive a recession…. as in, as a country, it will come out of the recession in one piece. China, on the other hand, might not be able to survive a recession in one piece. Not that China will break up, but that the social impacts on a recession in China will be just heartbreaking to witness and will lead to tremendous consequences related to stability.

  7. Rich says:

    March 23rd, 2008 at 7:34 am

    Adam,

    I agree that any recession in China will bring about a number of social impacts that could be disastrous. for me, China has a lot of staying power over the short term.. it is the 9-18 month period that I would view as most critical to its ability to hold up under a long term US recession.

    R

  8. Lisa Reisman says:

    March 28th, 2008 at 1:53 pm

    What a fascinating post. One thing to ask about the prediction is this: Even if China GDP surpassed US GDP, what does that mean for the China individual vs. the US individual? The same GDP divided by 1.3 billion vs. .386 billion yields a very different GDP per capita…the real mark of “equality” if we were going to compare Big Mac consumption and the like.

    From this perspective, “it’s possible”. As someone in the metals arena, I know that new mining will come on stream to meet demand (everyone has their iron ore shovel out there right now) But I wonder if the economists looked at things like the rate of innovation, number of new industries etc. Only innovation will drive sustainable growth. And that requires a massive educational boost both at the primary and secondary levels. PJ O’Rourke wrote a brilliant article some time back in conjunction with the Doblin Group about where the world’s innovation lives. To me, innovation combined with the environmental factors will impede growth, not the environmental factors alone.

  9. Rich says:

    March 30th, 2008 at 4:18 am

    Hi Lisa,

    Have a good weekend?

    I should point out that Jeff Sachs did make the distinction between US per capita GDP and China’s, but he did not address the Big MAc question. In my opinion, china is a Champagne chandelier where benefits are spilling over, but it will take time for the full benefit to reach the bottom.

    So – the question at this point, is will the average Zhou at the bottom be able to get a sip before the cost of the champagne is too much for those who are pouring the bubbley?

    As for your second assertion, I would agree. Innovation will be needed, particularly in the area of material usage, to enable the economy to continue growing at 10-15% for the next 20 years.

    R

  10. Josh in the UK says:

    May 7th, 2008 at 7:19 am

    I do have to wonder about China’s entrepreneurial capability (ergo Innovation). India developed it’s own space program in ten years, unlike China, which has been doing it for forty years. A lot of opinion in the UK is they will always be a copy me society. I am not so sure. But if they stay like that there simply won’t be enough growth. In the mean time, we have places developing in the UK to really push the boundaries of innovation e.g. http://www.ampwaverley.com/

    Best to you Rich, great stuff as always.

  11. Rich says:

    May 8th, 2008 at 7:38 am

    Thanks Josh.

    I am a firm believer that China is highly innovative, but before it starts producing at a level like the US it needs some systematic changes to take place:

    1) Universities need to be given free reign to experiment. It is something that is changing, but it use to be that if you tried something and it failed, you were seen as a failure and it was harder to get the next round of funding.

    2) Chinese firms needs to learn from GE, Microsoft,and others about the return on investment coming from R&D. the majority of scientists in some of the multinationals are Chinese anyway… so, it is not an ethnic thing… it is a commercial thing.

    R

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