US economists reject claims of China recession
Misconceptions underlined as they say exaggerating problems serves no one
A prominent US economist quoted solid economic data to dismiss the view that China would likely 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, or PIIE, wrote for Foreign Affairs in his article titled “China is still rising” published on April 2.
In it he refers to how China overcame even greater challenges when it started on the path of economic reform in the late 1970s, as well as arguing that many of the Chinese economy’s gloomy outlooks are based on misconceptions of data.
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 pandemic, while the United States’ was only 8 percent bigger.”
Lardy explained this “apparent paradox” mainly by two factors. First, China’s nominal GDP experienced a growth of 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. Then 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 they have done with their base interest rates led to a devaluation of China’s yuan, diminishing the value of its GDP when assessed in dollars.
Lardy said the factors both are likely to be “transitory”. The US policy was about to ease, and the yuan was set to appreciate soon. Chinese prices will boost in 2024, according to the forecasts from the International Monetary Fund. “Its nominal GDP measured in US dollars will almost certainly resume converging toward that of the US 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 this view with data, pointing out that China’s real per capita income rose by 6 percent in 2023, more than double the growth rate in 2022, while the per capita consumption increased by 9 percent.
“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 the third misconception — that stubborn deflation put China on a course toward recession. In his retort, he mentioned that the 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, and investment in manufacturing, mining, utilities and services witnessed an uptick. “No recession appears on the horizon.”
The fourth misconception, Lardy said, was “concerns the potential for a collapse in property investment”. He said that the fear was not entirely wrong but was exaggerated. Despite a noticeable decline in housing starts since 2021, it’s crucial to recognize that this shift isn’t solely indicative of capital flight. Rather, developers focus on completing housing projects, buoyed by supportive government initiatives.
“Completions expanded to 7.8 billion square feet (725 million square meters) in 2023, eclipsing housing starts for the first time,” Lardy wrote.
He described “that Chinese entrepreneurs are discouraged and moving their money out of the country” as the fifth misconception, pointing out “the pessimism is not supported by the data”.
Market correction
“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 rising with 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, not to 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,” he said. Lardy added some comments on the Chinese economy to China Daily, adding, “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, said he agrees with Lardy’s positive evaluation of the state quo and outlook of the Chinese economy.
Jack Midgley, the principal of global consultancy Midgley & Co, also expressed his 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. All of the economic signs are positive,” he added.