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How To Be A China Bull – Business Insider

The third question is about future sources of growth. Since it is now widely accepted that investment growth must slow sharply (unless we can find – and execute in spite of political constraints – many trillions of dollars of these new “good” investments) it is obvious that only a surge in consumption growth can replace investment.

So the question for the bulls is: how specifically will China cause consumption to surge? Since at least 2005 Beijing has tried to force up the growth rate of consumption and it has not been able to do so. More worryingly, there is some evidence that the growth rate of consumption may be dropping.

But – and this is just arithmetic unless we assume explosive growth in the external sector – if investment growth drops, consumption growth must rise by a much larger number (because consumption is much lower than investment) to maintain the same level of growth. If you cannot specify the mechanism that will cause consumption to grow (and please don’t propose an improvement in the social safety net), unless you deny that China must reduce investment growth you have no choice but to accept that GDP growth will slow sharply.

Any China bull that does address these three questions is missing the point. I am of course not suggesting that there is no answer to these questions. I’ve already written extensively on steps China can take – economically efficient but politically difficult – to address both debt and consumption growth. Any bullish forecast, however, that cannot come up with answers to these three questions is as useful as forecasts in 1989 and 1990 that Japan would get over its own domestic imbalances and continue growing by 7% annually for the next two decades – because it had always grown quickly in the past.

As an aside one of the predictions cited in the SCMP article above to “prove” future rapid Chinese growth is that “The Economist expects Chinese GDP to surpass America’s by 2018.” Regular readers know that I have a bet with The Economist on just this subject.

via How To Be A China Bull – Business Insider.

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