Why the World Is Too Optimistic About China's Economic Future | Hacker News Reader

Why the World Is Too Optimistic About China's Economic Future

qz.com

64 pointsjeffreyrogers44 comments

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.

You can't just take the GDP growth on its own and say: "this number is fairly high compared to other countries". Yes it is, but china needs to maintain a ridiculous growth rate to pay for the costs and upkeep of its economic machinery. The GDP figure is propped up by vast amounts of investments that are financed by debt taken out on the basis that future growth will pay for it. Do you see the problem? Does it remind you of anything? Yes, it is exactly what the West is/has been doing.

China is doing the western policy of growth fuelled by debt. Betting on China is tantamount to betting on unfettered money printing shrouded in a veil of corruption and secrecy. Debt financed by production that is consumed by the west. A bet on China is a bet on the US. Let's not forget the massive exposure to western debt and assets. It's as simple as that.

To make things a touch more spicy, China also has an opaque shadow banking system that was tiptoeing around a meltdown just last year.

China is not doing anything clever, they are just really adept at kicking the can down the road.

The future of China is only as bright as the future of US is I'm afraid. To think that China can somehow survive if the western countries collapse or dwindle away is folly. There are no independent players. A deleveraging that is big enough to dismantle Europe or the US will most likely cause a global collapse. It's impossible to predict what will happen if that hits China. How strong is the central government? To what end are they willing to go to preserve their hold on power? Tianamnen Square 2020?

The "invest in China for ridiculous returns" ship has sailed long ago. If anything, I'd be looking at taking profit and hedging all remaining exposure to China with urgency.

> "You can say what you want about too much debt, overpriced real estate, manufacturing, etc..., but they'll figure that out."

If this logic were applied to an investment decision it would be considered foolish regardless of the eventual result. You don't go looking for facts to support your economic thesis; those are easy to find. You look for the objections to that thesis and think very critically about them, trying to figure out how (not just if) the strengths of the country or company can compensate for those weaknesses. Blithely dismissing some of the most significant objections to your thesis is the most damning signal of not having thought it through.

The future of... conspicuously consuming luxury goods? Thanks but I'll pass. It's also not totally clear how sustainable the whole thought police thing is in the long-term. The larger and more educated is the middle class, the more of a problem it will become for them.

Conspicuous consumption is an interesting concept, but it's over used.

Rolexes don't mean anything if everyone can afford one. The consumption of the middle classes has elements of all sorts non rational behavior, but dismissing people's economic motivations this way is disrespectful, especially people you don't know.

Personally I see ambition, especially ambitious for the next generation as a healthy disposition. What it will be applied to will vary and change, but the ambition itself can build momentum.

Why would the thought police situation cause economic collapse? If there's enough pressure, things will change. China already has changed politically quite a bit over the last 50 years.

>law of big numbers ...Lenovo is #1 in computer sales ...China owns the solar business

I think the big numbers thing is slowing things already. Going from 10% to 20% of the solar market is fine, 80% to 160% can't happen.

I agree China will do well. If you look at how Chinese people do anywhere outside China (Singapore, London etc) they all get degrees, drive nice cars and so on. Mainland China was reduced economically to close to zero by Mao's communism and is now catching up to how the Chinese are anywhere else.

The fundamental problem with China's growth since 2009, is that it has all come courtesy of truly massive amounts of debt.

To generate annualized 7% GDP growth requires five +/- times as much debt as they get in new GDP.

I don't see how an economic model built on growth via accumulating debt faster than any other country in world history has, is a sustainable model. They're courting disaster, and decades of stagnation, just like Japan did.

Debt to whom, though? Remember that all debt is someone else's asset. This is where the wealth of China's rich individuals is going: back into the system as loans, bonds and investment to keep the machine going.

Agree 100% but there are always idealists who thinks China is some miracle country pushing ahead of anyone else. China is basically your neighbor who just bought a second Porsche by taking out an even higher mortgage after his home price was marked higher by the bank. You can call that success. I call it unsustainable debt.

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...

Thank you for your insight into how easy it is to be a rich foreigner in a country where per capita income is roughly 10% of what it is in the US.

China has very very real issues that they haven't addressed in the slightest. They're building tons of real estate that has almost no chance of ever being useful to bump GDP, they're facing domestic unrest in Hong Kong, and they're transitioning into being a more open democratic society. Nobody knows how this is going to work.

Firstly, 10% per capita means 20% per capita because nobody pays tax. Secondly, nobody knows the real numbers because it's largely a cash economy. US real estate is largely empty too. People here don't need cars to live, and overheads on everything are far lower, so 20% per capita is actually a much nicer life than in the US. Say you have $20 per day, you can live really fine here. People are supported in retirement by their families, who they continue to live with, so there's no need to save as much beyond your children's education. Hong Kong 'unrest' is irrelevant to mainland China, except to show that the government has already vastly improved its capacity to respond to such situations. Everyone here knows exactly 'how its going to work': the Communist Party will stay in power.

I think you're missing the point of the article. Your "my life as a rich foreigner in China" comment doesn't really address of the concerns Larry Summer had about China's future, and in fact it doesn't even seem to be particularly negative about the country (it's mostly drawing comparisons to other nations who rapidly developed in recent history), so I think you're being a bit defensive.

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...

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?

Which city are you in? The sailing and food sound great

Fuxian Lake, Yuxi, Yunnan

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...

> I can't read anything by Larry Summers without thinking about this article from Naked Capitalism

I'm no fan of Larry Summers, but that article was crap. He was there from 2001-2006, and in 2008 they lost a bunch of money.. which the article says is Summers fault.

You know what Harvard said in 2007 about their fund [0]:

Harvard University’s endowment earned a 23.0 percent return during the fiscal year ending June 30, 2007. With FY07 being one of the best performance years since the inception of Harvard Management Company in 1974 ... In addition to significantly outpacing the University’s total return target, HMC significantly out-performed its internal benchmark. Furthermore, the fiscal 2007 performance compares favorably to that recorded by other large investment management institutions. Specifically, the endowment’s return of 23.0 percent out-performed the median for the 151 large institutional funds as measured by the Trust Universe Comparison Service (17.7 percent), as well as the 20.9 percent that marks the top 5 percentile.

The fund posts record gains, but when the economy tanks and everyone loses money, at Harvard it's Summers fault. If he was as terrible as the article says, they had two years after he left to undo the damage he caused. Instead they waited until the recession hit, then unwound it.

Actions speak louder than works (not to mention story telling after-the-fact when you need a scapegoat).

http://news.harvard.edu/gazette/story/2007/08/harvard-endowm...

Edit: note that the gains in 2007 ($5B) were significantly more than the loses in 2008 ($2B) that summers supposedly caused. Since 2001, the fund nearly doubled(!): http://news.harvard.edu/gazette/2002/09.26/06-endowment.html

If you want to blame Summers, the key was that he allowed or wasn't able to stop the university from purging in 2005 the Harvard Management Company team that had provided their outsized earnings for so long. Although you can't necessarily blame him for making sure their inept replacements didn't squander money after he himself was purged in the following year. (E.g. the lost a billion dollars simply by not noticing one investment was going to hell and ending it.) And certainly not for the university pretending that after getting rid of that team they'd still be able to earn the same amount of money.

Yes, it did happen before. From 1929 to 1933 the USSR transformed from an agrarian country to worlds second industrial power by having the equipment of thousands of factories (bought on the cheap, after the Great Depression started) transported from US and West Europe. Similarly the Nazi Germany from 1934 to 1938 became 3rd in industrial output.

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.

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.

An important and tragic reminder of the importance of contraception as a technology there.

The argument is exactly that when China shifts to a nation of consumers it will not grow at 7.5% but at maybe 4%. Currently it is not a nation of producers it is a nation of infrastructure builders, that is what is driving the growth, not production, the largest infrastructure investment (50% of GDP per year) ever seen. Consumer economies just dont grow that first continuously.

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.

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.

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.

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.

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.

Here is a link to an ungated copy of the paper mentioned in the article: http://www.frbsf.org/economic-research/events/2013/november/...

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

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.

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

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.

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.

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... [2] http://www.thebubblebubble.com/china-bubble/ [3] http://nextcity.org/daily/entry/surprise-china-built-the-wor... [4] http://www.washingtonpost.com/opinions/the-politics-of-china...

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.

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?

A related blog post that also mentions the Summers and Pritchett paper: http://blog.mpettis.com/2014/10/how-to-link-australian-iron-... .

Reply on news.ycombinator.com