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.

"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."
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.
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.
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.
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."
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.
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.
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.
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...
...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.
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.

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More from @michaelxpettis

Dec 16
"China is considering new measures to help the country’s debt-laden real estate industry to improve its balance sheets." According to Liu He, "there is plenty of demand to support stable development of the real estate industry."

He pretty much has to say that, whether or not he believes it. It would cause a panic if someone at his level were to acknowledge publicly that there isn't likely to be enough demand to justify to the recent pace of building.
Beijing is in a tough position. The property sector had become far bigger than the economy could justify and property prices among the highest in the world, so they knew they had to constraint it (indeed they've known for years, but until last year no one dared to anything).
Read 6 tweets
Dec 15
Good article. The WSJ says Beijing is planning to set a 5% GDP growth target for theChinese economy in 2023. This is probably broadly in line with most expectations.

wsj.com/articles/china… via @WSJ
While much of the debate will now focus on whether or not China can reach the target, for me the much more important discussion is on the quality of the growth it is able to achieve, and the sustainability of that growth.
Although I expect the first quarter to be quite difficult, as China adjusts to the end of zero-COVID policy (and assuming that they're able to adjust non-disruptively without once again reversing policies), I think they will be able quite easily to achieve a 5% growth target.
Read 5 tweets
Dec 15
I agree with Brad here, and I think this is a very important point misunderstood by many. The reserve currency country doesn't need to run trade deficits so much as it needs to accommodate whatever position the rest of the world requires from it.
In the 1950s and 1960s (and even earlier), most of the world's major economies were rebuilding from two world wars, and so needed to import foreign savings. In that case the reserve-currency country had to run surpluses to accommodate savings shortages abroad.
It was only after the global economy had been substantially rebuilt by the late 1960s and 1970s that it began to save more than it could invest domestically, and that's when it needed the reserve-currency country to absorb those excess savings.
Read 4 tweets
Dec 15
"Beijing should focus on revitalising its beleaguered private sector to stabilise economic recovery, Chinese economists and policy advisers say."

Among other things, they say, Beijing must "lift expectations and confidence among entrepreneurs."

This may at first sound reasonable, but is in fact based on a misunderstanding of the underlying problem. The main problem with China's entrepreneurs isn't that they lack confidence, but rather than they lack demand.
The fact that years of supply-side support has only left them weaker and less confident than ever should show that what the private sector really needs, ironically, is less direct help and more indirect help through demand-side policies that benefit consumers.
Read 4 tweets
Dec 15
November's economic data continued to weaken even faster than expected. Industrial output rose 2.2% year on year, well below expectations, but even that was good compared to retail sales, which fell 5.9%, also well below expectations.

We still have one more month left in the quarter, but it's pretty clear that Q4 will turn out to have been terrible for the Chinese economy. After several months of weak output growth and much weaker consumption growth, it is clear that the economy is struggling.
But bad as that it is, what really matters is that the economy is also getting even more seriously unbalanced. The November results alone could lower the consumption share of GDP by as much as 30 bps.
Read 6 tweets
Dec 14
More Chinese inland localities are moving to spur economic growth with forceful measures, says the Global Times. Local governments, they report, propose regaining economic momentum by doubling down on investment.

But without a rise in consumption, and with weakening exports, it is unlikely that private businesses will want to invest. This means that most of any increase in investment must be driven by public sector investment in infrastructure.
The main concession to boosting consumption seems to be to encourage the service sector to resume operations, as if their main constraint weren't lack of effective demand for their services.
Read 4 tweets

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