August 13, 2012

China Has not Peaked

The Diplomat tries to make a case that China's Rise peaked in 2008. (BTW - thediplomat site is not visible from some common domain name servers.) This article was heavily discussed on reddit.

They list of issues which they argue will prevent China from continuing to outperform economically or to otherwise rise in power are:

1. State capitalism.

The most serious long-term obstacle to Chinese growth is its state capitalist system. In the last decade, Beijing has largely reversed pro-market reforms and embarked on a decidedly statist developmental path. Consequently, state-owned enterprises have gained enormous clout in the economy and enjoy monopolistic privileges. The financial system favors such firms at the expense of private entrepreneurs. Household income, at 43 percent of GDP, is too low to support a higher level of consumption, a critical factor in rebalancing the Chinese economy and providing a source of future growth. Without systemic reforms, according to an influential World Bank study, growth in the coming two decades will fall well below 7 percent per annum. But reforming state capitalism is almost impossible politically because that will undermine the very foundations of the Communist Party's rule.

NBF Counter - There are successful examples of state capitalism. Those are Singapore, Taiwan and South Korea.

Some will say so those are small countries which China cannot copy. China goal is have about 200 cities like Singapore of 2020. 200 cities with a population of 6 million. It could also be considered 26 provinces like South Korea (50 million each).

Some will say that China has to have the exports to maintain high growth. Net exports does not seem to have been a major component of GDP growth for the last 30 years.

2. Short term issues

For awhile, Beijing's ability to keep its economic growth high was lauded around the world as a sign of its strong leadership and resilience. Little did we know that China paid a huge price for a misguided and wasteful stimulus program. The bulk of its stimulus package, roughly $1.5 trillion (with two-thirds in the form of loans from state-owned banks), was squandered on fixed-asset investments, such as infrastructure, factories, and commercial real estate. As a result, many of these projects are not economically viable and will saddle the banking system with a mountain of non-performing loans. The real estate bubble has maintained its froth. The macroeconomic imbalance between investment and household consumption has barely improved. Today, Chinese economic policy-makers are hamstrung in trying to revive economic growth. The combination of local government indebtedness, massive bad loans hidden in the banking system, anemic external demand, and diminishing returns from investments has made it all but impossible for Beijing to use the same old economic playbook to fire up the economy.

NBf Counter - The infrastructure will be used. Urbanization and development at 1% (13 million people per year) of China's population will rapidly absorb any excess real estate.

Aging Demographics

Nationmaster ranks countries by the percentage of population over the age of 65

South Korea also has an aging population.

China is still at 9% over age 65. The USA is at 13.1%. Yes, the one child policy will cause that ratio to increase quickly but China will have a couple of decades to increase urbanization and per capita wealth and ride a wave of robotics and automation to manage this transition.

NationMaster has China at 37% urban. South Korea is at 83% urban.

China has room to develop with urbanization. The urbanized workforce is one that can continue to grow for many decades. This more productive population is what can drive China's growth.

Research shows that doubling population and increased urban density boosts productivity by about 15%. China will be able to leverage Sky City Skyscrapers to boost the population density of its downtown urban areas to increase per capita GDP and productivity. I see the impact of Sky Cities and Broad Factory mass produced skyscrapers like the move from 3 to 4 story buildings to cities with 30 story buildings. Average skyscrapers are now 30 to 50 stories tall. This factory mass production will make 100 to 300 story buildings affordable and common. Eight times the density would be a 45% boost to productivity.

China's infrastructure push will also create megacities which will boost the connections between cities.

China is planning to By 2015, China will have a high-speed railway network that will encompass almost all its cities with a population of more than 500,000, the State Council. The plan says China should complete the construction of a high-speed railway network with a total operating length of more than 40,000 km by the end of 2015. It was expected that the 300 kph limit would be increased to 320km/h with a corresponding increase on 200 km/h lines.

China's urban population has 3.2 times more income than the rural areas. As of year 2010, per capita disposable income of urban households stood at RMB19109 while rural households’ were at RMB5919. China still had GDP growth in 2011 and 2012.

Per capita GDP in the was about US$10,000. Having GDP per capita stall out would still have China coasting to US$15,000 to 20,000 per capita by completing urbanization. This would be about US$28 trillion.

the 4 by 4 network. 4 North South Lines and 4 East West Lines

The cost benefit analysis studies for the high speed rail sections looks to be reasonable (unlike the cost benefit analysis for California's high speed rail)

A roundtrip airfare from Hong Kong to Guangzhou is $368. A roundtrip on high speed rail will be $46.

The high speed rail will be more environmentally friendly than airplanes.

4. Another difficult obstacle ahead is environmental degradation. Beijing has neglected environmental protection for the sake of rapid growth. But the costs of environmental degradation have become unbearable, both economically and politically. Water and air pollution today cause 750,000 premature deaths and around 8 percent of GDP.

The US, UK and other nations had massive levels of air and water pollution from the 1930s through the 1960s. There were 14,000 deaths from the London fog and there were burning rivers from pollution. This pollution was greatly reduced and there was no massive growth collapse caused by the pollution. The pollution was a problem for the US and UK and is still a problem, and it is a problem for China but a case cannot be made that the environmental problems will lead to a collapse in national growth.

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