A US economist cautions against downplaying China's economy

A prominent US economist cited China's solid economic data to dismiss the notion that the country could enter a long recession.

"While its growth has slowed in recent years, China is likely to expand at twice the rate of the United States in the years ahead," Nicholas Lardy, a nonresident senior fellow at the Washington-based Peterson Institute for International Economics (PIIE), wrote in an April 2 article in Foreign Affairs titled "China is still rising".

He said that China overcame even greater challenges when it started on the path of economic reform in the late 1970s.

Lardy contended that much of the gloomy outlook on the Chinese economy is based on data misconceptions.

A "widely held misconception", he wrote, was that "the Chinese economy's progress in converging with the size of the US economy has stalled".

"It is true that from 2021 to 2023, China's GDP fell from 76 percent of US GDP to 67 percent," Lardy noted. "Yet it is also true that by 2023, China's GDP was 20 percent bigger than it had been in 2019, the eve of the global pandemic, while the United States' was only 8 percent bigger."

Lardy explained two factors for the "apparent paradox".

First, China's nominal GDP grew 4.6 percent last year, trailing behind the 6.3 percent increase seen in the US. However, the narrative shifts when factoring in inflation for each nation, or in China's case, disinflation. In that calculation, China's GDP would exceed that of the US, with 5.2 percent and 2.5 percent growth rates, respectively.

Second, the US Federal Reserve has raised interest rates aggressively from 0.25 percent to 5.5 percent since March 2022, while the Chinese central bank has done the opposite, easing the interest rate from 3.70 percent to 3.45 percent.

What the People's Bank of China has done with the base interest rates led to a devaluation of China's yuan, diminishing the value of the nation's GDP when totaled in dollars.

Lardy said the divergence is likely to be "transitory". The Fed is expected to ease rates this year, and the renminbi is set to appreciate soon.

Chinese prices will rise in 2024, according to forecasts from the International Monetary Fund (IMF). "Its nominal GDP measured in US dollars will almost certainly resume converging toward that of the United States this year and is likely to surpass it in about a decade," wrote Lardy.

Another misconception, Lardy said, was that China's household income, internal spending and consumer confidence were weak. He rebutted that view with data, pointing out that real per capita income rose by 6 percent in 2023, more than double the growth rate in 2022, while per capita consumption increased by 9 percent.

Lardy noted that Chinese consumption grew more than income, which happened only when the households reduced the savings share of their income, showing that consumer confidence was not weak.

"China will likely continue to contribute about a third of the world's economic growth while increasing its economic footprint," Lardy added.

Lardy wrote about a third misconception — that stubborn deflation put China on a course toward recession. In his retort, Lardy mentioned that core consumer prices, excluding food and energy, rose by 0.7 percent last year.

He also mentioned that Chinese businesses escalated borrowing, both in absolute terms and as a proportion of GDP; investment in manufacturing, mining, utilities and services experienced an uptick. "No recession appears on the horizon," Lardy wrote.

The fourth misconception, Lardy said, was concerns about "the potential for a collapse in property investment". He said that the fear was not entirely mistaken but was exaggerated.

Despite a noticeable decline in housing starts in China since 2021, it's crucial to recognize that the shift isn't solely indicative of capital flight, he said. Rather, developers are focused on completing housing projects, buoyed by supportive government initiatives.

"Completions expanded to 7.8 billion square feet in 2023, eclipsing housing starts for the first time," Lardy wrote.

Lardy said the notion "that Chinese entrepreneurs are discouraged and moving their money out of the country" is the fifth misconception, pointing out that "the pessimism is not supported by the data".

"Almost all the decline in the private share of total investment after 2014 resulted from a correction in the property market, which is dominated by private companies," he wrote. "When real estate is excluded, private investment rose by almost 10 percent in 2023."

Lardy also said that the number of businesses was climbing: a total of 124 million enterprises employing about 300 million people.

Despite the "well-documented headwinds" China is facing, including a housing market slump; restrictions imposed by the US on access to some advanced technologies; and a shrinking working-age population, Lardy warned the West, particularly the US, to not write off China, saying that "exaggerating these problems serves no one".

"Demographics are negative, but they could be greatly alleviated if the government gradually raised the retirement age for workers," Lardy told China Daily. "On one calculation, that could lead to a working-age population roughly constant for the next decade rather than continuing the decline that has been underway for several years."

Gary Hufbauer, also a nonresident senior fellow at PIIE, told China Daily that he agrees with Lardy's positive evaluation of the state quo and outlook for the Chinese economy.

Jack Midgley, the principal of global consultancy Midgley & Co, also expressed optimism about the Chinese economy to China Daily.

"China's performance continues to be strong, not perfect, not unchallenged," he said. "The fact is, if you zoom out, China has lifted more people from poverty in a shorter period of time than any economy in the history of the world.

"There's nothing structural there. The population is still growing, productivity is still growing, and exports are still growing," Midgley said. "All of the economic signs are positive."