I greatly admire and avidly read Gavyn Davies blog, but his latest comments on China, unusually, lack precise numbers which therefore creates some ambiguities which can give unnecessary credibility to wrong analysis. Putting in precise numbers should bring clarity.
China's government has spelt out officially its precise growth target. That is to increase GDP by 100% in 2010-2020 – about four times the prospective growth rate of the US in the same period.
Given China’s cumulative growth in 2010-2012 (17.8%) this means China has to hit a 6.9% average growth rate for the rest of the decade to achieve its target. As all this is unambiguously spelt out the relevant yardstick is whether China will achieve this.
It is a wholly spurious method, not used by Gavyn but used by others, to invent some target China never set and then claim there is a ‘crisis’ because China has ‘failed’ to achieve a target it never put forward! There is no indication China is falling below its projected growth target - China’s growth this year will clearly be above the target rate.
If Gavyn, or anyone else, wants to say argue there is a serious crisis in China, they have to claim growth will fall below the average 6.9% rate – some people do of course, so we will examine that below.
As for the efficacy of the 2008 stimulus programme it can be seen in two sets of figures. In the five years between the 1st quarter of 2008 and the 1st quarter of 2013 China’s GDP grew by 51.8% and the US by 3.5% - the EU and Japan contracted. This is shown in Figure 1.
Figure 1
To remove any claim of possible distortion caused by the depth of the US recession in 2007-2009, in the year to the 1st quarter of 2013 China’s economy grew by 7.7% and the US economy by 1.6% - that is China’s economy grew 6.1% faster than the US economy, or at 480% of the US growth rate. This is shown in Figure 2.
Figure 2
The argument that China is suffering from economic ‘crisis’ on anything like the scale of the US, Europe or Japan, for example because of its recent liquidity problems, is rather like the spurious argument that really the flu is the same as polio because they are both illnesses!
As for the suggestion that Michael Pettis has been proved right I am afraid that although he edits his blog very fairly his predictions on China are extremely inaccurate. In 2009 he insisted: ‘'I continue to stand by my comment last year... that the US would be the first major economy out of the crisis and China one of the last.' This statement is entirely inaccurate – as the more than 50% growth in China and less than 4% in the US since the beginning of the financial crisis shows. His new thesis is that: ‘'I still maintain that average growth in this decade will barely break 3%.' The projection of 3% growth is itself entirely inaccurate but given China’s existing growth this means that for the rest of the decade it would have to grow at 1.6%!!! The reason for such inaccurate predictions is that Michael Pettis makes, as shown in his book The Great Rebalancing, one of the oldest errors in economics – underconsumptionism, that is the confusion of demand (consumption plus investment) with consumption. He himself lists in the opening pages a whole series of underconsumptionist authors.
Coming back to Gavyn’s blog, China’s growth rate continues to be above the target it has set itself of 100% GDP growth in a 10 year period. That will be about 4 times US GDP growth in the same period. China will overtake the US to become the largest economy in the world in approximately 5 years. The rest of the world would be highly delighted to have such a ‘crisis'’.
I actually sort of assume Gavyn doesn’t disagree with those numbers? If I am wrong, and he does then of course it would clarify the debate, if he gave his own. But indicating numbers is the best way to clarify the discussion. My projection is simple – China will hit its 100% GDP growth target over a 10 year period.
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