Most economists predict that the Chinese economy will continue to grow and that it will rival the size of the US economy in the foreseeable future. If that happens, it will mean that Chinese people will no longer work for the kind of wages that allow so many consumer products to be sold inexpensively in the United States. For many years, inflation in the US has been held down by low Chinese wages that allow American to buy products so cheaply. If the Chinese economy grows as expected, that will come to an end. Consumer product companies will have to find new countries for manufacturing or pay Chinese workers more money. Either way, increased Chinese prosperity will be reflected in consumer prices in the US and retail prices for consumer products will rise. In short, American consumers will have to pay more for what they buy for less today.
I am not so sure. The scenario of rising consumer product prices depends on China continuing to grow as it has for the last 30 years. While most economists accept that premise, some don’t and I think the skeptical view is compelling. It doesn’t have to mean that the Chinese economy shrinks, it just means that the rate of growth in China will slow, to something like 2% from 7-9% and that difference will be meaningful. It will mean that factories in China will still compete effectively to make consumer products at prices that are not so different from what they get today and that will hold down prices in the US. A recent report from Capital Economics makes the case very well. Here are the major highlights:
China has stimulated growth through investment. That’s how other Asian countries like Japan and South Korea grew their economies and become wealthy countries today. But China has not been as effective in spending its capital as Japan and South Korea were. The level of relative wealth achieved in China today is not as high as Japan and South Korea had when they made the transition. You only have to visit China to see six- and eight-lane highways all over that are largely unused. It means they created jobs during their construction but once they were built, they didn’t add as much as roads in other places did following their completion. And with so much having been built, the likelihood that new construction will stimulate growth is not as high as in the past.
China’s share of world exports is already high. That means there’s limited growth in continued expansion of its export-led strategy. There could well be more growth in China’s share of the world export market behind it than in the future.
China is growing older faster. Because of the one-child policy that was in force for so long, the number of people employed will start contracting soon. That didn’t happen in Japan and South Korea until they were much wealthier than China is now.
In order to continue its expansion, China has to find new ways to improve its productivity. The best way to do that is to create new technology. China’s track record is in producing other people’s technology inexpensively. Their track record creating products from new ideas developed in-country is minuscule. Also, productivity comes from creativity which springs from the open development of new ideas. With China’s government exerting increasing control over free expression, the likelihood of new creative ideas developing is getting lower, not higher.
It’s tempting to look at the growth curve of China’s expansion and just extend it out. It’s also obvious that hundreds of millions of people still work in agriculture that is highly inefficient and they would be ripe for migration to more industrialized work that creates higher wages. But you also have to wonder: those people working in agriculture have had the opportunity to migrate for decades and haven’t done it yet. Doesn’t it make more sense that the most highly-motivated people have improved their lives and that it will be harder to get the next cohorts to change. Doesn’t it make more sense to say that a top-down, government-run economy has gotten the advantage of the lowest-hanging fruit and that growth at this point will be harder? I find that argument compelling.
In 18 of the last 20 centuries, the Chinese economy has been the biggest in the world. It’s only the last two centuries when that hasn’t been true. So it’s inevitable that China will be the number one economy in the world eventually and the question is when. My answer is – not soon. They will have to make some structural changes in order for that to happen and that is not something on the horizon.