The Free Exchange blog at The Economist has accepted the Michael Pettis bet, and very cleverly (the bastards!) they have added a second one. Michael Pettis rejected making basically the same bet with me.
The two bets.
1. The Economist says that at the then current dollar/RMB exchange rate China will be the world’s largest economy in 2018. Pettis predicts that China will not be the largest economy.
2. Pettis says that in real RMB China’s average annual growth rate for the rest of the decade will average 3.5% or less. The Economist disagrees. There is some question as to how to define “real”. They will have to agree on an acceptable GDP deflator.
I believe it is a 60% chance that the combined China/HK/Macau GDP of 2018 will exceed the US GDP in 2018. I think it is 95% chance by 2020.
My latest forecast of China and the US GDP. So I believe the 2012-2020 GDP growth average will be just over 8%.
Year GDP(yuan) GDP growth USD/CNY China GDP China+HK US GDP 2011 47.2 9.2 6.3 7.5 7.8 15.2 2012 53 8.1 6.2 8.7 9.0 15.9 2013 59 8.5 5.8 10.2 10.5 16.5 2014 66 8.5 5.5 11.9 12.2 17.2 2015 73 8.5 5.2 14 14.3 18 2016 80 8 4.9 16.3 16.7 18.8 2017 88 8 4.6 19.1 19.5 19.6 2018 97 8 4.3 22.6 23 20.5 2019 107 8 4.1 26 26.5 21.5 2020 115 7.5 3.9 29.6 30 22.4 2021 125 7.5 3.7 33.7 34.2 23.4 2022 135 7.5 3.5 38.5 39 24.5 2023 145 7 3.3 44 44.5 25.6 2024 157 7 3.1 50.6 51 26.7 2025 170 7 3 56.5 57 27.9 2026 183 7 3 61 61.5 29.2 2027 198 7 3 66 66.4 30.5 2028 214 7 3 71.2 72 31.9 2029 235 7 3 78.4 79 33.3 2030 259 7 3 86.4 87 34.8
China’s leadership has room to maneuver
I believe that China with its surpluses and extra hard currency can afford to stimulate as needed without going too much into debt. I think even with the local government debt now China still only has about 40-50% of GDP in debt. They officially ended 2011 with 47.2 trillion yuan of GDP and US$300 billion (Hong Kong and Macau). The US had to borrow to stimulate.
While the US has gone to over 100% of GDP debt. And China still has $3.3 trillion in reserves.
I think China is still growing fast and has more future to mortgage. I realize that the growth is actually a lot more uneven than the official numbers but the growth is real. The fluctuations in electricity consumption are a more real tracking.
China did pass the US to have the most electricity consumption in the world and is now about 10-15% ahead of US electricity consumption. If China keeps on track say for 3 years. Then they are 20-25% bigger in GDP. Plus they have 4% per year inflation. At the end of 2015, they have 63 trillion yuan GDP and US$350 billion from Hong Kong and Macau).
If they have 20 trillion yuan in debt now, they can add 16 trillion yuan in debt and still be less than 60% of the 2015 GDP.
China will use more of the $3.3 trillion (and still increasing) more the Singapore Temasek fund. They buy strategic industries and influence. They avoid the mistakes that Japan made and do not overpay for trophy properties.
They keep urbanizing and getting the low per capita GDP rural people upgraded to productive urban citizens making 3-4 times as much. Each 1% of population fully urbanized and productive adds 2-3% to GDP. 10% more population urbanized adds 20-30% to GDP. China needs to phase out the Hukou system as they have started to do and get rd of the one child policy. I do not see how they give up the 2-3% extra GDP from 1% of population successfully urbanizing for twenty to thirty years. Maybe that stalls out for 1-2 years. But then regular 3% growth plus 2% urbanization edge. Means a long term 5% GDP growth for 20-30 years until China is 85-96% urban.
I think there are advantages to governing and managing a fast growing and rising economy. China is a collection of cities and rural provinces. Shanghai, Beijing, Tianjin are all already past or passing the middle income trap level. After three years all the second tier cities are past and in 6 years all of the third tier cities. China has used its large demand to get all the technology for its domestic car industry, wide body planes, nuclear reactors, coal reactors, high speed trains, robotics (Foxconn making 1 million industrial robots), electronics, computers, shipping. Broad Group is leading the world with factory mass produced skyscrapers which are 30% below the cost of other Chinese building developers. I think they can get their goal of 30% of world commercial construction by 2020.
In the 2008, 2009 downturn, China scooped up thousands of the young financial people who became unemployed in New York.
China is obtaining/has obtained the commodity base and infrastructure to support a world #1 economy.
Get to 2020 in decent shape and the Foxconn/iRobot industrial robot revolution has gotten to a scale that changes the game. In terms of taking out the aging demographics concern about lowering productivity of an aging workforce. We should start seeing some interesting stuff by end of this year or next year. Roomba vacuum type base, long neck and placing tablets or smartphones as the head with computer power, camera and display.
In terms of overbuilding. If you have a rapidly growing child, then you overpurchase and get things that are too big and they will rapidly grow into it. It is not as healthy to plan for excessive growth in an adult or mature economy because an adult usually grows by packing on fat.
South Korea had a stall for about 3 years when it was already $15,000 per year in per capita income. If China has a stall for 3 or even 4 years at $15,000 per year in per capita income then that will also be ok. That would be at about the $22 trillion total GDP level. going to South Korea GDP growth rates of 3.5-5% in the 2020s will still work out fine. So timing on and delaying the onset of slower growth matters.