China’s growth prospects: ‘Sinophoria’ or despair?

Jane Golley is an economist and Associate Director of the Australian Centre on China in the World (CIW) at the Australian National University (ANU). Her research has covered a wide range of Chinese transition and development issues, and is currently focused on rural-urban inequalities in education and provincial population dynamics and economic growth. This article draws on material that will be presented in a new online Masters course offered by CIW, called “China: Wealth and Power” (for further information, please contact Jane, the course convenor, on — The Editors


Justin Yifu Lin and Zhang Weiying: Two views of China's economy; image from Caixin: Top Chinese Economists Debate Role of Gov't in Economy

Justin Yifu Lin and Zhang Weiying: Two views of China’s economy; image from Caixin: Top Chinese Economists Debate Role of Gov’t in Economy

In early 2015, China’s Premier Li Keqiang lowered the country’s official rate of growth of GDP to ‘around 7 per cent’, which he is touting as the ‘new normal’ rate of growth, in contrast with the heady double-digit levels of the past. This was the first time the official growth target has not been a precise figure, and one that has routinely been achieved, if you believe the official statistics.

Many independent estimates of China’s growth for 2015 are lower by two or three percentage points – an indication of how much uncertainty there is even in the short term. Longer-term forecasts (or ‘guestimates’, as they should be called) vary even more widely, ranging from optimistic predictions as high as 7 percent through to 2020 and 6 percent through to 2030 to doomsday scenarios about the economy’s imminent collapse. If the doomsayers are right, the future for the Chinese and global economies is grim.

In a recent paper entitled ‘Asiaphoria versus regression to the mean’, two American economists, Larry Summers and Lant Pritchett reflect on these wide-ranging forecasts. ‘Asiaphoria’ reflects the belief that Asia is destined to become the centre of global economic activity in the next two decades. Summers and Pritchett challenge this view for being too optimistic, arguing that forecasters tend to place too much emphasis on recent rates of per capita GDP growth, which – given those of China and India compared with Europe and the US – drives this Asiaphoria.

Instead, they analyse a long-time series of cross-country growth data and argue that China, like all other countries, will inevitably ‘regress to the mean’ of long-term historical growth trends at around 2 to 3 percent. That is, a country’s future growth performance has very little to do with its own past performance, and much more to do with historical norms of growth everywhere.

As they show, the difference in the future size of China’s economy based on an extrapolation of current growth rates versus ‘regression to the mean’ is huge: the former would increase China’s GDP by $51 trillion by 2033, compared with $11 trillion for the latter, making this a ‘forty trillion dollar’ question.

Summers and Pritchett then argue that for China to defy the ‘unavoidable truth in the numbers’ and continue to grow above the mean for an extended time period, there would need to be something extraordinary about the country.

Surprisingly (I think), they cannot come up with anything that fits the bill. Instead, they argue that growth collapses are common, and often vastly underestimated. In China’s case, they suggest that the high degree of government involvement in business and the authoritarian regime add to the likelihood of a growth slowdown there. Building on this, they explain how a transition to democracy would severely disrupt China’s institutional framework, which has until now provided favoured firms with connections to the existing power structure. A shift in power away from the Party would then ‘precipitate very sudden stops as investor expectations have to realign to new realities’, with economic growth collapsing as a consequence.

I’m not convinced by all of their logic, but one thing I do agree with is that China’s future rates of economic growth depend critically on the ability of the Party to remain in power.

If you believe David Shambaugh – and other China ‘collapsists’ – that ability is disappearing fast. His 2015 essay in the Wall Street Journal titled ‘The Coming Chinese Crack-up’ lists five indications of the regime’s vulnerability: the intensification of political repression; the false pretense of compliance with the party line; rampant corruption; the large number of China’s elites with ‘one foot out the door’; and the economy, which is ‘stuck in a series of systemic traps from which there is no easy exit’. This leads Shambaugh to argue that ‘The endgame of Chinese communist rule has now begun’ and ‘its demise is likely to be protracted, messy and violent’.  He doesn’t claim to know when the Party’s demise will actually occur, but nevertheless concludes that ‘we are witnessing its final phase’.

This is certainly not how Xi Jinping sees it. At the National People’s Congress in March 2015, Xi introduced his ‘Four Comprehensives’, which are being propagated by the state-controlled media as a major contribution to Communist Party ideology. These tie together his ambitions to pursue economic and legal reforms, maintain party discipline and achieve the ‘Chinese dream’ of national rejuvenation. This, on top of his sweeping anti-corruption campaign, which has targeted hundreds of thousands of officials at all levels of government and industry, reaffirms his commitment to reforming the economy while maintaining a tight grip on political power.

But Xi’s success is far from guaranteed. Pushing ahead with reforms that threaten either the wealth of powerful ‘vested interests’ in government and industry, which profit so much from the status quo, or the livelihoods and employment prospects of ‘the masses’, has proven difficult in the time since the Third Plenum in November 2013, when Xi laid out his ambitious reform agenda. It is made even more difficult now that rates of economic growth are slowing. Li Keqiang is hoping that the people will be satisfied with his ‘new normal’ rate of growth. But if these rates do not deliver rising living standards for the majority, the Party’s already diminishing legitimacy as China’s ruling power could be seriously challenged. And with that, the economy would undoubtedly suffer enormously.

There are a large number of other ‘unknowables’ that make it incredibly difficult to predict China’s economic future. Some of the uncertainties come from external forces – like the European economy, China’s largest export market, which remains precarious at best. But many are internal, including the possibility of a large debt default by local governments, who received a massive injection of funds through the central government’s fiscal stimulus package in 2009 in the wake of the global financial crisis. Whether this package turns out to be a stroke of ‘Keynesian’ genius or a ticket to disaster simply isn’t known – despite many claims to the contrary.

More generally, there is little consensus among economists about the ‘optimal’ level of state intervention in the economy. So there is little consensus about what the optimal ‘reform package’ should be, or about the impact that the actual reform package will have on future rates of economic growth.

The ongoing debate between two prominent Chinese economists – Justin Yifu Lin, former chief economist of the World Bank, and Zhang Weiying, Professor at Peking University’s National School of Development, illustrates this point.

On the one hand, Lin argues that ‘more than 95 percent of China’s policies made over the past thirty-five years have been correct or the country would not have had such rapid growth rates and it would not have become the only major economy that was not severely crippled by the financial crisis’. Zhang, on the other hand, sees a reform process that has ‘not been successful’ in recent years and argues that ‘Plenty of theories have argued that there is no way the job [done by the market] can be done any better. The market is not a tool for society to support when it is efficient and oppose when it’s not. It is a guarantee for basic human rights to be realised. Only when certain basic rights are guaranteed, including property rights, can the market economy have a stable foundation’.

Lin and Zhang are not the only two economists to disagree. Hu Angang, in his Foreign Affairs article, is decidedly ‘Sinophoric’ about the country’s ‘new normal’ growth, which he thinks will be maintained in the decade ahead, leading him to conclude that ‘The Chinese century is not at the beginning of the end; it is at the end of the beginning’. This view contrasts with the many Western economists, including Paul Krugman, who believe that China’s model of growth is no longer viable, with the question being not if the Chinese economy will crash, but when.

As the world’s soon to be largest economy, with the world’s largest population, run by one of the world’s very few one-party states, I think there are many reasons to think that China’s future growth trajectory will not conform to historical norms. That is not to say that I am confident that the Party will steer its way through an economic reform process that will deliver both strong economic growth and stability to its people indefinitely. If I had to pick sides between Xi, Lin and Hu versus Shambaugh, Zhang and Krugman, I’d stick with Xi, Lin and Hu for now. But I wouldn’t bet my life on it!