
Why the World Is Too Optimistic About China's Economic Future - jeffreyrogers
http://qz.com/281609/larry-summers-explains-why-the-world-is-too-optimistic-about-chinas-economic-future/
======
Mikeb85
As far as I'm concerned, the world isn't optimistic enough about China. Yeah,
growth has slowed (eventually it must, simply because of the law of big
numbers).

But data just came out today, 7.3% GDP growth for this quarter versus the same
quarter last year. Slower than hoped for, but still very good.

People may not have noticed, but China is already a consumer juggernaut.
Lenovo is #1 in computer sales. Lenovo is the 3rd largest cell phone maker in
the world (!!). And they've barely even closed the Motorola deal.

Alibaba was the biggest IPO ever, and the Agricultural Bank of China was the
second largest ever. When the Hong Kong-Shanghai stock connect goes live,
they'll have the second largest stock exchange in the world.

They're the largest market in the world for luxury goods. They have 1.3
billion people, the middle class is growing exponentially, and they're highly
educated.

People talk about innovation and talk about iPhones. China owns the solar
business (so much that the US puts tariffs on Chinese solar companies), and
invests more in clean technology than anyone. They've got some incredible
technology companies and innovative industrials, even if none of it reaches
our shores.

The future belongs to China. You can say what you want about too much debt,
overpriced real estate, manufacturing, etc..., but they'll figure that out.
All one needs to do is visit China, see their markets, see the consumer goods
and what's happening over there to know that they own the future.

~~~
contingencies
Agreed: yet another China bashing article. What these innumerable western
China observers touting economic jargon in their articles miss is the fact
that China is self-sufficient in most meaningful ways.

Yes, they do import luxury goods, no, a shortage won't cause national issues.
Yes, they have an energy challenge, no, that's not ignored ... in fact it's
reasonably easy to argue that China is further on top of world energy
challenges than any other nation.

What's it really like here? Most people live where they were born, or in the
nearest large city. They might go to study in a larger city when young. They
make ends meet, have a roof over their head, have cell phones, electric
scooters or motorbikes (in the countryside), and the affluent and middle
classes have cars and can travel.

As a foreigner, it's surprisingly comfortable once you get over the visa hump.
A few days ago I came back from a major city with bottles of wine and cheese,
about the only hat-tip to imported stuff except perhaps Steam games and the
occasional Amazon book in my lifestyle.

Yesterday I rode my electric scooter to the morning market and ate a sort of
bean soup with fresh coriander, chilli and garlic and lovely spring onion
breads. I think a breakfast for two came to about $1. Then my wife and I went
shopping for fresh vegetables for the family, in a massive market featuring
produce picked the same day piled in much greater variety than any western
supermarket. We spent perhaps $8 which is enough for perhaps 10 people for a
day, otherwise for multiple days.

I worked during the day via VPN, then in the evening sat in front of the
widescreen TV to enjoy some flat-rate video on demand from the extensive -
despite our semi-rural location - international selection available through
the local cable company. Afterwards, we got on Taobao and ordered a couple of
wetsuits, some gloves and sailing shoes. Equally, we could have ordered
arbitrary quantities of almost any chemical or object you can imagine.

This morning I woke up to a lovely salad with ample cashews and blue cheese,
checked in to my email, then rode the electric scooter to go sail a catamaran
on our local 210 square kilometre alpine lake for three hours. The weather was
perfect, and it's practically November here in the northern hemisphere at an
altitude of 2000m (6500ft). I'm getting ready to participate in the first
national sailing competition to be held here next month.

After sailing, my wife, aunt and I sat down to a lovely meal in a restaurant
featuring a sizzling beef hotplate, a plate of shitake mushrooms and greens,
and a tofu and tomato dish with spring onions. Meanwhile, my mother in law
looked after our child for free - no need for paid childcare here! Total cost
of the meal? Perhaps $8. We discussed some plans to help our aunt open a new
restaurant, since her last business partner was rather a nasty character.
Decades ago, she was a star English student... perhaps she will open something
western?

There are almost zero homeless people here, people have a family support
network to fall back on, and tangible freedoms are in many instances more
numerous than in much of the west. Yes, there are limitations in every society
- it's just a matter of knowing where they area. Legal weed? It grows here
wild, naturally, and you can buy sacks full of seeds in the market. Mushrooms?
We're the world capital. Paragliding, sailing, off-road mountain biking,
climbing, etc... it's all here.

Oh, poor China - how I loathe thee! 13 years and counting ;) Of course, I
wouldn't want to live in the east coast cities...

~~~
adventured
China's biggest problem, besides the mountains of debt, the record inequality,
the broken farming (in which ~600 million people are being kept busy with
intentionally inefficient farming practices so they have something to do), the
lack of individual freedom, the lack of property rights for farmers, the
pollution, and the heated conflicts with most of their neighbors - is probably
water. 20% of the world's population, 5% to 6% of the world's fresh water, and
falling:

[http://qz.com/166235/chinas-water-shortage-is-so-bad-it-
coul...](http://qz.com/166235/chinas-water-shortage-is-so-bad-it-could-turn-
out-the-lights/)

~~~
hga
Speaking of inequality, what about the gender ratio caused by the One Child
policy? How stable can a country be when 10s of millions of men have no hope
of getting married?

------
joshuaellinger
China is a special case. For most of human history, it was a major power. In a
sense, their recent growth is just catching up to the long-term historical
norm.

It is also different in that the US basically shipped them manufacturing
capability (in some cases literally shipping the machines from Ohio). I don't
think that has happened before at anything close to this scale. This is the
first industrialization period without a major destructive war at the end (so
far...)

What happens if China shifts from a nation of producers to a nation of
consumers like the US did in the 1950s? What happens if nuclear weapons or the
example of the US keep their rulers from getting into costly wars? What
happens if they control energy production in 25 years because they force all
their producers to convert to solar early and dominate the industry.

Overall, I am skeptical that a historical study really generates much insight
-- we are in uncharted territory.

Finally, I can't read anything by Larry Summers without thinking about this
article from Naked Capitalism. [http://www.nakedcapitalism.com/2013/07/why-
larry-summers-sho...](http://www.nakedcapitalism.com/2013/07/why-larry-
summers-should-not-be-permitted-to-run-anything-more-important-than-a-dog-
pound.html)

~~~
frozenport
China's historic grandeur is overstated. Consider this eye opening quite from
Adam Smith's The Wealth of Nations 1776:

 _The poverty of the lower ranks of people in China far surpasses that of the
most beggarly nations in Europe. In the neighbourhood of Canton many hundred,
it is commonly said, many thousand families have no habitation on the land,
but live constantly in little fishing boats upon the rivers and canals. The
subsistence which they find there is so scanty that they are eager to fish up
the nastiest garbage thrown overboard from any European ship. Any carrion, the
carcase of a dead dog or cat, for example, though half putrid and stinking, is
as welcome to them as the most wholesome food to the people of other
countries. Marriage is encouraged in China, not by the profitableness of
children, but by the liberty of destroying them. In all great towns several
are every night exposed in the street, or drowned like puppies in the water.
The performance of this horrid office is even said to be the avowed business
by which some people earn their subsistence._

~~~
quonn
When Smith wrote, China had already fallen behind. Unlike the United States,
they have been there for 3000 years, though. I recommend "Why the West rules -
for now" by Ian Morris if you want to get an idea of this.

------
nickbauman
I've always been bearish on China's long term because of a few realities
people interested tend to gloss over. Ten years ago, China was a nation of 900
million rural peasants who were essentially subsistence farmers, with no money
at all. Then there was a cohort of about 100 million agricultural farm
workers. These were people who _occasionally_ had money. The remaining 300
million consisted of a largely poor underclass, a tiny "middle class"
consisting of people with the buying power of less than the American minimum
wage worker. Finally an "elite" class of workers who made more than an
American burger flipper. Of those who had money, they saved 40% of their
income in fear of hard times.

Things have changed somewhat, but this heavily uneven and stratified society
(of which we Americans increasingly resemble, sadly) continues unabated. I
just don't see good economic outcomes from that.

------
nichtich
Over the years I've read a lot of arguments from both sides: China's growth
will continue for a quite long time vs. it'll end soon. Both have some valid
and interesting points and I'm still not convinced either way.

But there's a more general theme I find interesting. If you are to predict how
long something is going to last, given it already lasted longer than its
peers, there are always two kinds of thinking: a) it's already stretching
itself so it'll end soon, or b) the fact it already lasted this long means our
references are not correct, and this could last a lot longer than we thought
possible.

------
Animats
Piketty in his well-known "Capital in the 21st century", points out that rapid
growth isn't unusual as countries catch up to the state of the art. Countries
that are leading technologically grow more slowly, but from a higher level.
Beijing and Shentzen may have caught up, but the interior provinces of China
are still in catch-up mode.

China is still building out its inter-provincial highway system and its high
speed rail system. There's about another ten years of building those out. The
government of China has been building new cities far from the coast,
recognizing that the coastal areas are way over-urbanized and growth has to be
moved elsewhere. It's still not clear how those will work out.

------
zhte415
A system's growth rate and its long term interest rate are identical. [That
doesn't necessarily mean getting a long from a bank, or from relying on a
currency.] The return on capital is the cost of capital when accounted for
system-wide. A very simple lens that is rarely understood.

------
netcan
Reporting that relates this directly to economics reads like a musing on some
esoteric philosophy. It's economists' own fault, presenting their profession
as a collection of mathematical models, the science of politics and history.
Saying things like _' boost efficiency and competitiveness'_ sounds like a
conversational reference to variables in an equation.

The driving force behind economic growth over a measurable period of time (not
quarters, or even years) is technology, in a wider sense of the word.
Companies are an invention. Political structures and the stability or
instability they cause is invention. Money itself was invented.

China was economically suppressed for a long time. When they found their
formula for industrialization they had a lot of catching up to do. Planting
techniques that increased yield. Manufacturing techniques producing more. They
spent 2 generations catching up. Catching up is a matter of applying existing
technologies. When they created the weaving room of the world, industrial
strength looms had existed for a long time.

The reality is the growth at that end of the spectrum is fast. Growth nearer
the recent invention end is slower, because invention and proliferation of
technologies are intertwined. That's the main story here. China is approaching
the point where they economic growth depends on technological advancement.
Things need inventing. That's slower.

Looking at this at the resolution of months, it seems that central bank
policies are the engine of advancement. Financing, consumer appetites.. This
is nonsense. Imagine the output of a country like Germany doubling or tripling
of more over generations. That's what x% annual growth means. They will need
to learn to make more with the same number of people. That can only happen
because of technology.

So, that's the default prediction. China's long term economic growth rate will
slow to the rate of technological advancement, mitigated in the short term by
politicized maneuvering. They are increasingly contributing to technology
though so maybe they can move the world's output by a couple of ticks.

------
jeffreyrogers
Here is a link to an ungated copy of the paper mentioned in the article:
[http://www.frbsf.org/economic-
research/events/2013/november/...](http://www.frbsf.org/economic-
research/events/2013/november/asia-economic-policy-
conference/program/files/Asiaphoria-Meet-Regression-to-the-Mean.pdf)

(The story itself should still point to the qz.com link, however, since that
is more relevant for most readers).

------
kyllo
TFA is correct that corruption and inequality are major hazards. But the
greatest and most immediate threat is the real estate bubble, in my
observation. There have been plenty of articles pointing out that the prices
are unsustainably high and fueled by speculation and artificially cheap loans,
and that the construction quality is terrible largely due to embezzlement.
It's not a matter of if it all comes crashing down, but when.

~~~
seanmcdirmid
Corruption and inequality caused much of the real estate bubble, however.

~~~
kyllo
Arguably so, by way of crooked government officials making cheap capital and
permits available to their friends in exchange for gifts and insider
investment opportunities.

------
mimighost
Because...everyone else sucks badly. If China's 7.3% gdp growth is defined as
slow and worrisome, what words would you pick for the situation in other
places, such as Europe?

However, it definitely has its own big problem, and if without proper
handling, it will become a global scale crisis. Yes, we are talking about the
housing bubble and a quickly aging population. At last, IMO, it is likely
China is going to be yet another Japan, just bigger.

------
timtas
Summers is most likely correct in his conclusions, but he is predictably wrong
is his explanation of the cause. The end of crony system, he contends, will
shift control to untested free market players, removing certainty of high
performance that the corrupt system produced. Although we might object to
central planning on cultural grounds, it has worked, and it's end will cause a
fall.

He's just as clueless the operation of boom-and-bust cycles in China as he is
here in America. He thinks that GDP growth indicates performance instead
simply activity, so no surprise he reads a downturn as caused by factors that
damage performance.

In China, as here, some GDP is good, and some destroys value and is thus
unsustainable. The coming downturn in China will be the cure for malinvestment
on an epic scale [1][2][3][4], not the disease. The crony system has generated
massive amount of activity, most of it economically virtuous, but a great deal
of it is economically evil, utter waste, and must be stopped and unwound. The
longer the crony system persists, the bigger will be the reckoning.

[1] [http://www.businessinsider.com/chinas-ghost-cities-
in-2014-2...](http://www.businessinsider.com/chinas-ghost-cities-
in-2014-2014-6) [2] [http://www.thebubblebubble.com/china-
bubble/](http://www.thebubblebubble.com/china-bubble/) [3]
[http://nextcity.org/daily/entry/surprise-china-built-the-
wor...](http://nextcity.org/daily/entry/surprise-china-built-the-worlds-
biggest-building-and-its-a-boondoggle) [4]
[http://www.washingtonpost.com/opinions/the-politics-of-
china...](http://www.washingtonpost.com/opinions/the-politics-of-chinas-high-
speed-train-wreck/2011/07/27/gIQAGedXdI_story.html)

------
drawkbox
Good article and observations. One thing to think about though from the scale
of China is that it still a pretty locked down market still. It has opened up
immensely and Hong Kong is always mentioned here. But they still oversee and
control many areas of their economy.

Strict control of a market can lead to one of two things: 1) falsifying growth
that isn't true market value demand or 2) growth being repressed by policy.

China could be possibly extending into their 36th year of high growth with
either of those. If the former it will end badly, if the latter, once they
really open up, they could exponentially still grow intensely. They are still
owed lots of money in debt and that it what helped spike the US after WWII,
other countries battered and in debt. Lots of riches will flow to China for
some time.

Another small point is China isn't as innovative yet as places like Japan or
South Korea. If they did innovate like that it could also get wild, but mostly
it is a copy economy as of now.

------
jayvanguard
Shouldn't he be looking at empire level data e.g. the growth of the US economy
over the past 100 years, the British Empire in the 1800s, or the Roman Empire
at its height.

No-one is saying Singapore or Cambodia is going to be the next world super
power so how relevant is it to compare their 5 year growth spurts to what
China is undergoing?

------
leoc
A related blog post that also mentions the Summers and Pritchett paper:
[http://blog.mpettis.com/2014/10/how-to-link-australian-
iron-...](http://blog.mpettis.com/2014/10/how-to-link-australian-iron-with-
marine-le-pen/) .

