- “China will grow twice as fast as the United States in the coming years,” wrote Nicholas R. Lardy for Foreign Affairs.
- He argues that much of his bleak outlook is based on a misinterpretation of the data.
- China's nominal GDP will surpass that of the United States in a decade if the yuan appreciates, Lardy said.
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China's bleak outlook is based too heavily on misconceptions and is blinding analysts to the country's potential for massive future growth, says economist Nicholas R. Lardy.
While many pessimists have now dismissed China's ability to return to the rapid expansion it enjoyed in the decades before the pandemic, the Peterson Institute senior fellow disagrees:
“China overcame even greater challenges when it embarked on the path of economic reform in the late 1970s. While its growth has slowed in recent years, China is likely to grow twice as fast as the United States in the coming years,” Lardy wrote in Foreign Affairs on Tuesday.
He points out that while China's GDP growth in 2023 appears paltry compared to the double-digit growth of previous years, pessimists believe this means China is falling behind the US economy.
China's nominal GDP grew 4.6% last year, outperformed by a 6.3% increase in the United States. But that changes when you take into account each country's inflation or, in China's case, disinflation, Lardy said. In this case, China's GDP exceeded that of the United States, with each country growing by 5.2% and 2.5%, respectively.
Misconceptions about growth also stem from the fact that Washington has aggressively raised interest rates since 2022 while China has done the opposite, Lardy said. That depressed China's yuan and reduced the value of its GDP in dollar terms.
But with U.S. policy expected to ease soon, the yuan is likely to appreciate in the near term, Lardy added: “Its nominal GDP, measured in U.S. dollars, will almost certainly approach that of the United States again this year and probably will.” surpass it in about a decade.
Lardy argues that Chinese bears are also wrong about internal spending in the country, with many fearing that consumers and businesses have prioritized savings over all else.
Instead, he notes that household consumption exceeded income last year as Chinese companies increased their debt and increased their investment in manufacturing, mining, utilities and services.
Meanwhile, many are not entirely wrong to fear a collapse in investment in China's vast real estate sector, even if this is exaggerated, Lardy wrote. For example, although there has been a dramatic decline in housing starts since 2021, this is not because money is flowing out.
Instead, encouraged by government policy, developers have placed greater emphasis on completing housing projects.
Others also described China's crackdown on private companies as a headwind to growth, arguing that it is drying up private investment and forcing entrepreneurs to leave the country, Lardy said.
“Almost all of the decline in the private share of total investment after 2014 was due to a correction in the real estate market, which is dominated by private companies,” he wrote. “If you exclude real estate, private investments rose by almost ten percent in 2023.”
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