Thread by @michaelxpettis

1/12
JCER now believes that China's GDP is unlikely to surpass that of U.S. in next few decades, and probably ever. I agree, of course, but I don't really think their most recent forecast is any more credible than their earlier ones.

asia.nikkei.com/Economy/China-…

2/12
"When the pandemic struck in 2020, JCER forecast that China would overtake the U.S. as the world's biggest economy in terms of nominal GDP in 2028 at the earliest, taking into consideration Beijing's quicker containment of the virus and economic reopening."

3/12
But, according to Nikkei, "In 2021 JCER pushed that forecast back to 2033 on the grounds that Beijing's tighter IT regulations would hamper innovation." Now they don't think it will ever happen.

4/12
I have at least two reasons for questioning the credibility of their forecasts (and those of many others). First and most obviously, credible long-term forecasts can change, but only very slowly and mainly because of major shocks that change the underlying growth dynamics.

5/12
COVID was certainly a shock, but it largely accelerated underlying weaknesses in all the major economies. It seems hard to argue that at first it caused a sharp improvement in China's relative growth prospects and then a sharp deterioration.

6/12
Much more questionable, in my opinion, is the claim that after forecasting in 2020 that China would overtake the US in 2028, "JCER pushed that forecast back to 2033 on the grounds that Beijing's tighter IT regulations would hamper innovation."

7/12
Beijing's tighter IT regulations have become the standard reason used by economists who misunderstood the dynamics of the Chinese growth model to explain why they got it wrong. Beijing's unexpected turn against the market changed everything, they claim.

8/12
But that makes very little sense. Did tighter regulations in some IT sectors slow China's long-term GDP growth rate? Yes, perhaps, but only a little, given what a small component of overall growth the IT sector comprises in China.

9/12
More importantly, the surge in subsidies to the IT sector overall should more than compensate for tighter regulations on some parts of the IT sector. In fact the IT sector has been and will continue to be one of the brightest, if smaller, parts of the Chinese economy.

10/12
So why will the economy continue slow? Because of the same old problems that have existed for over a decade and that have only intensified in recent years: an overstretched and massive property sector, substantial amounts of non-productive spending on excess...

11/12
...infrastructure, stagnant consumption growth, an over-reliance on debt to generate economic activity, institutional rigidities that make it hard to restructure the economy, a banking system totally underpinned by moral hazard and, of course, demographic decline.

12/12
China's economic slowdown is the necessary consequence of a very unbalanced economic model that generated enormous amounts of real growth before making itself obsolete. This story has happened so many times before that we don't need to explain it with sudden policy shifts.