Friday, July 12, 2013

More evidence that China's rise is not inevitable

Some time ago, I wrote a post about three China predictions, in which I argued that China was likely to become the worlds largest economy due to some basic factors in its economy: it was growing in real terms, it had positive inflation and had a nearly fixed exchange rate to the dollar.  This means that in dollar terms the inflation China experiences counts toward its economy's size (unless you measure in PPP).

I also suggested that longer term, China would be surpassed, not only by India, but also again by the United States, which simply has better fundamentals.

Recently, there has been mounting evidence that China's rapid boom is coming to an end.  Today I saw this, which shows that the evidence is now so compelling that it is turning even the general media's narrative.  In the short term, China will likely take the steps necessary to keep the economy growing at a 5-6% rate.  Premier Li has already indicated that 8% is no longer the target (and with a declining workforce, is most likely unattainable).

These are growth rates to which India can aspire (it needs to make some structural changes in its economy).  Indeed, India has at times exceeded these levels and could do so again.

Meanwhile, the US can keep chugging along at 2-3% and remain larger than China on PPP terms for a very long time.

Good news for China, however, is that the absorbtion of cheap labor means it can focus more on quality of the labor, and on quality of life, as it moves up the income scale.  Bad news is, most countries fail when they get caught in the middle income trap of too many skills (and too high prices) for cheap work, but not enough skill for higher wages.

We shall see, but I believe that if you work or invest in businesses / industries that rely heavily on Chinese growth to function as an escape valve (or as the primary driver of growth), you have to be very concerned that many of the capital investments undertaken to capture Chinese market growth may be written off.  The risks are rising that this will happen.

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