Longer term though, growth will not be as high as it was in the 2000s/2010s - if you read the more optimistic economists (Justin Lin Yifu, for example), they would argue that potential growth is in the mid-5% range for China; pessimistic economists out there believe China is stuck in the middle income trap already (capital formation as driver of GDP is tapped out given debt/GDP, population growth has reached its end, and they do not believe productivity growth will come). This is of course the center of debate as it relate to industrial upgrade in various sectors, which is the key to driving productivity growth (robots making more things faster, for example).
In short, China is in a bit of a liquidity trap with weak, but notably improving consumer/business confidence. I'm fairly optimistic that 2023 will see some bounce back - but the longer term is not as rosy as it was pre-Shanghai - that really changed the fundamental behaviour/expectations. I've met with some Chinese companies' management teams lately, and we are seeing some green shoots, 2023 should be much better than 2022.
Also, you have to understand the transition to a 3rd Industrial Revolution requires a higher ratio of Debt to GDP, as the previous ratios are seen in the 2nd Industrial Revolution is no longer relevant.
As per Rifkind's analysis/work on productivity, less than 14% of economic growth is from the combination of capital formation and labour improvements. 86% is accounted for by "aggregate energy efficiency" with Energy generation and transportation as 2 of the 3 key elements.
The 2nd Industrial Revolution is overwhelmingly powered by the internal combustion engine and coal electricity generation, which have comparatively low upfront capital costs and much larger operating costs.
In the 3rd Industrial revolution, when you look at Solar, Wind, Nuclear and Electric transport, these are all capital intensive with large upfront costs and low operating costs.
So this will require economies to run higher debt ratios, at least at the beginning of the 3rd Industrial Revolution where we are now.
Here's something I wrote a few months ago
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At a micro-level, I see Chinese companies having a unique combination of advantages in terms of:
1. A huge domestic market.
China has a population larger than the combined West. For example, this means more smartphones are consumed by China every year than in the combined West.
2. Ample development and production resources
In terms of available financing, scientific personnel, technical personnel and production personnel etc. 30% of global manufacturing resides in China, which is more than the USA, Japan and Germany combined. The Nikkei recently also reported that China has passed the USA in terms of the quantity and quality of scientific research papers. Batelle and the NSF are reporting that Chinese R&D spending is comparable (or has exceeded) the USA these days.
3. Middle-income cost levels in China versus higher costs in the developed West
4. Speed of execution
So given time, Chinese companies can leverage world-class technology development at a lower cost and faster speed than their counterparts in the developed West.
Chinese companies can put these products into production faster. They'll find ready customers in the vast Chinese market, and therefore be able to produce at scale and at lower cost than their competitors.
So Chinese companies should be able to catchup and then compete with foreign rivals on a global basis in every sector. Of course, foreign companies can invest in China as well to take advantage of these factors. Just look at Tesla which has made Shanghai their main production and export location and also to tap into the Chinese market which accounts for 60% of the world's electric vehicle sales. But foreign companies are generally slower and less attuned to local tastes than domestic Chinese companies like BYD which has a dominant position in the Chinese electric vehicle market.
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China is still only a middle-income country which is not yet fully urbanised, so there is still significant growth yet from urbanisation.
China also has an exceptionally high level of R&D spending at 2.4% of GDP. This is exceptionally higher (more than twice as high) as any other low-income or middle-income country. They are all stuck around the 1% mark.
If China was stuck in the middle-income trap, it means this level of R&D spending is being wasted, since most R&D spending is conducted by private companies (as per The Economist). And if these private companies are wasting money on R&D, then they should have gone bankrupt or reduced R&D spending.
But that is not what we are seeing reported by the vast majority of Chinese companies. Furthermore, overall Chinese R&D spending is still growing explosively every year and I expect it to reach 3% of GDP in 5 years time. The implication is that Chinese R&D spending is profitable and finding a market for its products, which would make sense given the advantages outlined previously.
And on a historical note, Chinese R&D spending has seen significant increases over the past 20 years, as per OECD figures. So this isn't a new thing, but something which has been sustained for decades.
And if Chinese R&D spending reaches 3% of GDP - that would be comparable to Germany and the USA. After that there are only a handful of countries (all high-income) with higher levels of R&D spending. And the implication is that a hi-tech China becomes wealthy.
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Looking further to the future, the Chinese economy is roughly equal to the US, when looking at the PPP and nominal figures. But China has a population some 4x larger than the USA, so China is still only a middle-income country. Therefore China does still have a lot more growth potential than a mature US.
China already has a commanding overall lead in the technologies underpinning the Third Industrial Revolution (eg. Solar, Wind, Batteries, Electric Vehicles, 5G/IOT, AI/ML). Rifkind's book "The Third Industrial Revolution" outlines this.
So like the UK and USA in the 2 prior industrial revolutions, what are the chances of China becoming a wealthy, hi-tech nation? And given that China has 4x the population of the USA, you would expect the Chinese economy to become 4x larger.
Of course, this hasn't happened yet and will take another 20+ years to play out.
But it is easy to imagine:
1. China with higher military spending than the US
2. China driving the clean energy revolution globally and mitigating the worst effects of climate change
