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29 March 2013

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Bob Mckee

John
Any comments on Martin Wolf's more pessimistic view

Martin Wolf of the Financial Times has even gone so far as to pen an article titled, ‘Why China’s economy might topple’. Wolf generally speaks on behalf of conventional and institutional thinking. A contrarian would be tempted to view his bearish comments on China quite bullishly. But his main point is that after 35 years of double-digit GDP growth, China will grow more like the advanced economies of Japan in the 1970s and South Korea in the 1990s, at about 6.5% a year.

Officials at China’s Development Research Centre of the State Council (DRC) have written a paper called ‘Ten-year outlook: Decline of Potential Growth Rate and Start of New Phase of Growth’. The clunkily titled paper lays out five reasons why China may experience a sharp decline in growth, starting now. Wolf writes:


‘First, the potential for infrastructure investment has ‘contracted conspicuously’, with its share in fixed asset investment down from 30 per cent to 20 per cent over the past decade. Second, returns on assets have fallen and overcapacity has soared. The ‘incremental capital output ratio’ – a measure of the growth generated by a given level of investment – reached 4.6 in 2011, the highest since 1992. China is getting less growth bang for its investment buck. Third, growth of the labour supply has fallen sharply. Fourth, urbanisation is still rising, but at a decelerating rate. Finally, risks are growing in the finance of local governments and real estate.’

Greg Canavan looked into most of those factors last year in his ‘China Bust’ report. The recovery of iron ore prices after their big dip last August caused a lot of people to brush off Australia’s China worries. But between Wolf’s five points and Stockman’s point about the end of the infrastructure boom, it is impossible to ignore the fact that China can’t keep spending money it doesn’t have on infrastructure and development projects that generate no real return on capital.

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John Ross

  • Is Senior Fellow at Chongyang Institute for Financial Studies, Renmin University of China

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