China: Apocalypse Later?

Each year there is a loud chorus of pundits predicting that China’s boom will turn to bust.  And each year they are wrong.  It looks like 2012 will be no different:

Property prices in China have fallen for five consecutive months, but in a strange twist the stocks and bonds of Chinese property companies have been rallying this year, as investors grow more confident the sector will see a soft landing and avoid a major bankruptcy.
The Shanghai Composite’s property subindex has gained nearly 12 percent this year, outpacing the 5 percent gain in the broader index.

Anita Yadav, managing director at the corporate bond brokerage and asset management firm SJ Seymour Group says high-yield property bonds have also rallied over the past three months and spreads aren’t as wide as they were late last year.

“Till end of last year the expectation was that there were going to be some bankruptcies, but by January this year, we realized that, yes, the market was bad, but it wasn’t going to be so bad,” Yadav told CNBC.

In a report issued last month, Standard Chartered also pointed out that there were signs of hope after the drumbeat of negative news last year. “Apartment sales have improved since the Lunar New Year break,” Lan Shen and Stephen Green wrote. “Developers are a little more confident about apartment sales, and price cuts of 10-20 percent are apparently helping to nurture demand.”

On Friday, China’s largest property developer Vanke seemed to confirm a rebound, reporting a 24 percent increase in sales in March over the previous year. It was the second consecutive month Vanke had reported a year-on-year sales increase.

The price system works surprisingly well in China, despite the half-communist nature of their economy.  Chinese buyers actually use their own money to buy homes, so in a sense the US housing market circa 2005 was much more “communist” than the Chinese market.

China boosters like Robert Fogel claim that China will soon grow to be twice as rich as France the EU.  Others pundits claim it will get stuck in the middle income trap.  Both the boosters and pessimists are wrong.  Like Japan, like Britain, like France, indeed like almost all developed countries, it will grow to be about 75% as rich as the US, and then level off.  It won’t get there unless it does lots more reforms.  But the Chinese are extremely pragmatic, so they will do lots more reforms.

China is currently a very poor country, so the Chinese model has nothing to teach the West.  If we want to learn from the Chinese culture, learn from Singapore (or Hong Kong), which is how idealistic Chinese technocrats would prefer to manage an economy; indeed it’s how China itself would be managed if selfish rent-seeking special interest groups didn’t get in the way.  But they do get in the way—hence China won’t ever be as rich as Singapore; it will join the ranks of Japan, Korea, Taiwan, and the other moderately successful East Asian countries.

This isn’t any sort of “miracle.”  Go visit China and look at the airports, roads, subways, office buildings, shopping malls, etc, that they are building.   Look at educational levels in the cities (to which they are rapidly moving.)  It would be a miracle if a country that could do those things got stuck at the middle income level.  I’ve visited both Mexico and China quite often.  Mexico is a middle income country that is currently richer than China.  But any tourist who visits both places (with eyes wide open) can quickly see who will be much richer in 30 years.  There’s no stable equilibrium where the coastal Han Chinese get fully developed and the interior Han Chinese stay middle income.  And the coastal Chinese are closing in on developed status very rapidly.

PS.  My GDP estimates for 2012 were from the year-end issue of the Economist.  They had (PPP) GDP per capita as follows:  Japan, $36,000, France, $36,220, Britain, $36,310, the United States, $49,340.   Most other developed countries are close to $36,000.  That’s “normal.”  The US is weird.

I expect China to end up in the “normal” category, mostly based on its cultural similarity to other moderately rich East Asian countries.  Outside of the US, Germany is the richest big country ($40,280), and they aren’t even close to US income levels.  Catching up to the US per capita income with a population of over 10 million?  Now that would be a true economic “miracle.”

PPS. I linked to a post by Tyler Cowen that discusses some 1992 research on growth in Singapore and Hong Kong.  At that time it was fashionable to argue that the Singapore miracle would soon peter out, as it was achieved by throwing lots of capital at the economy (as in the Soviet Union), not by boosting productivity.  I never believed that argument (which obviously proved to be wrong), mostly because I had visited Singapore in 1991.  Development textbooks go on and on about capital, natural resources, technology, education, Solow growth models, blah, blah, blah.  They miss the most important concept: Countries that have their act together.

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