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The future of China is no longer what it used to be


It is not clear exactly how the housing bubble in the Asian country will end, but it will not be pretty

In early 2022, many were portraying Joe Biden as a failed president.

His legislative agenda seemed stalled, and economic difficulties seemed to guarantee devastating losses in the midterm elections.

Instead, what happened was that the Reducing Inflation Act was passed, which is primarily a weather bill that totally changes the landscape, the much-vaunted "red wave" [of the Republican Party] was left in a state of wave and while many economists continue to predict a recession, unemployment remains low and inflation has been subsiding.

In contrast, at the beginning of the year, Xi Jinping, China's supreme leader, continued to puff up his victory over the covid.

And indeed, for a time, it was common to hear claims that China's apparent success in managing the pandemic was a red carpet for its new role as the world's leading power.

Now, however, Xi has abruptly ended his “zero covid” policy, and everything points to a huge increase in hospitalizations and deaths that will strain the health system to the point of collapse;

it seems that the Chinese economy will have to face major problems over the next two or three years;

and long-term projections for Chinese economic growth are being revised downward.

More information

Fear, crowded hospitals and opacity in China due to the covid

Apparently, the future of China is no longer what it used to be.


China's ability to limit the spread of the coronavirus through draconian lockdowns was meant to demonstrate the superiority of a regime that does not need to consult citizens, that can simply do what needs to be done.

However, by now, Xi's refusal to prepare for the takeover, along with his failure to adopt the most effective vaccines and to vaccinate the most vulnerable citizens, highlight the weaknesses of authoritarian governments where no one can tell you. the leader who is wrong.

Beyond the prospect of an imminent carnage, China's longstanding macroeconomic woes seem to be coming to a head.

It has been clear for years that China's economy, despite its astonishing growth record, is seriously imbalanced.

A very small proportion of the improvements that this growth has brought has reached households, so private consumption remains very low as a proportion of gross domestic product.

This has been offset by extremely high investment rates, but all indications are that these investments are yielding increasingly poor returns, making companies increasingly reluctant to embark on new initiatives.

Nonetheless, China has managed to maintain full employment, mainly by promoting a huge housing bubble.

China's real estate sector reaches colossal dimensions.

By one estimate, it represents 29% of GDP, and investment in real estate as a percentage of GDP is double the levels reached in the United States at the height of the real estate bubble in the first decade of the 21st century.

Such a situation is not sustainable.

Economists often cite Stein's Law: "If something can't go on forever, it will stop."

Exactly how China's bubble will end is unclear;

there could be a sharp slowdown, or there could be a period of “low quality” growth that hides the true extent of the problem, but it's not going to be pretty.

However, what has really surprised me is the way that analysts have been lowering their long-term projections for Chinese growth.

Two caveats about it.

First, nobody is very good at predicting long-term growth;

As MIT economist Robert Solow quipped not long ago, attempts to explain differences in national growth rates often end in a “great display of amateur sociology.”

Second, when measuring the size of national economies, one must differentiate between the dollar value of GDP and output measured at "purchasing power parity," which is typically higher in low-income economies. low, where the cost of living tends to be relatively low.

According to this last measure, the calculations indicate that China overtook the United States around 2016. But the dollar-based measure could be considered more important when it comes to geopolitical influence.

So when will China take the lead?

Recently, Goldman Sachs, which previously projected China to be the No. 1 economic powerhouse by the mid-2020s, has pushed that date back to 2035. The Japan Center for Economic Studies, which previously projected Chinese leadership to 2028, and then 2033 , now claims that it will take a few decades to produce.

Some analysts think it will never happen.

Why this new pessimism?

Part of the issue has to do with demographics.

China's working-age population has actually shrunk since 2015. China's economy can still grow rapidly if it maintains strong productivity growth.

But China's political missteps seem to reinforce the perception that it is entering the "middle income trap," a widely recognized (if controversial) phenomenon whereby some poor nations quickly catch up, but only up to a point, and they stagnate well below the income levels of the most advanced economies.

None of this should be interpreted as undermining the enormous rise in living standards in China over the past four decades, or as denying the fact that China has already become an economic superpower.

But if they took China's economic supremacy for granted, they may have to wait a long time.

As I was saying, the future of China is no longer what it was.

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Source: elparis

All business articles on 2022-12-31

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