China’s big year ahead
Halfway through a decade in which China set out to rebalance its economy, it is poised to drastically enlarge its role in the world. Let me explain why.
Back at the start of the decade, I made certain assumptions about how the so-called BRIC economies - Brazil, Russia, India and China - would perform in the 10 years ahead. Five years on, China is the only one of the four to have either met or possibly slightly surpassed my expectations. Assuming that China’s soon-to-be-published fourth-quarter gross domestic product number will come in at or close to 7.3 percent, as many experts assume, then from 2011 to 2014, China will have averaged real GDP growth of just less than 8 percent. I had assumed it would be 7.5 percent for the full decade (as did Chinese leaders back in 2011), and China could achieve this if its economy continues to grow by 7 percent for the next five years.
If so, it will have become a $10 trillion economy in current nominal U.S. dollars, well more than half the size of the United States (probably even bigger, adjusting for purchasing power), twice the size of Japan, bigger than Germany, France and Italy put together and not far off one and half times the size of the other three BRIC economies put together.
Brazil and Russia, for their part, have significantly disappointed my expectations. Indeed, their economic performance supports skeptics of their long-term potential, who attributed earlier growth primarily to high commodity prices. India also disappointed, but its growth rate accelerated in 2014. With the election of Narendra Modi as prime minister and the large drop in oil prices, India still has an outside chance of meeting my expectations for the full decade. It could even grow more than China in the second half.
Many international commentators remain bearish about China, expecting real GDP growth to slip significantly below 7 percent. The reasons cited usually involve some combination of excessive debt, inefficient lending, weaker export markets and consumers’ ongoing inability to play a bigger role in the economy. All of these things are relevant, but they are challenges that Chinese policymakers are familiar with and seem eager to overcome.
What has become especially intriguing, in contrast to this pessimism, is how strongly Chinese equity markets have performed since early November. For the past few months, the Shanghai index has been the top-performing market. What happened to all those claims that Chinese equities never rise? The eternal bears now say the Chinese market is an unsustainable bubble and/or that local buyers have been essentially press-ganged into buying equities in order to make the economy look good. Perhaps illiquidity is playing some role, but it seems unlikely to be much of the story.
I can think of at least three basic reasons to be bullish on China: First, the collapse of crude oil prices will boost consumers’ real incomes, helping them play a larger role in the economy.
Second, even though property prices have recently stalled and begun to fall, China will probably avoid a serious credit crunch, partly because Chinese policymakers have been more serious about restraining prices before they can collapse. Moreover, the price decline has made real estate affordable for more Chinese.
A third reason to be optimistic is the subdued nature of inflation in China. This allows for more accommodative monetary policy going forward.
Taken together, these factors will make it easier for China to rebalance its economy - by raising wages, increasing property-ownership rights for urban migrants and reforming pension systems.
In 2016, when China - with its economy growing at 6 to 7 percent - chairs the G-20 nations, it can do so as a fully engaged member of the global economy.
The author is a Bloomberg View columnist.
by Jim O’Neill