US economist rejects claims of prolonged recession in China

A well-known economist from the United States has countered the view that China is likely to enter a prolonged period of recession with economic data that suggests otherwise.

"While its growth has slowed in recent years, China is likely to expand at twice the rate of the US in the years ahead," Nicholas Lardy, a nonresident senior fellow at the Washington, DC-based Peterson Institute for International Economics, wrote in an article titled "China is still rising", which was published in the Foreign Affairs magazine on April 2.

In the article, he talks of the many challenges that China has overcome from the time it started on the path to economic reforms in the late 1970s, arguing that much of the gloomy outlook about the Chinese economy is based on misconceptions.

A "widely held misconception", he wrote, was that "the Chinese economy's progress in converging with the size of the US economy has stalled". Lardy noted that between 2021 and 2023, the size of China's GDP fell from being 76 percent of that of the US' GDP to 67 percent. However, it is also true that by 2023, China's real GDP was 20 percent higher than what it was in 2019, while the US' GDP was only 8 percent higher.

Lardy said this "apparent paradox" is the result of two factors. First, China's nominal GDP experienced growth of 4.6 percent last year, trailing 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 have exceeded 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 interest rates from 3.70 percent to 3.45 percent. This has led to a devaluation of the Chinese currency, diminishing the value of the nation's GDP when assessed in dollars.

Lardy said that both factors are likely to be "transitory". Policy easing is likely in the US, while the renminbi is set to appreciate soon. Chinese prices will rise in 2024, according to International Monetary Fund forecasts. "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," Lardy wrote.

Another misconception, Lardy said, is that China's household income, internal spending and consumer confidence are weak. He rebutted this view with data showing that China's real per capita income rose 6 percent in 2023, more than double the growth rate in 2022, while per capita consumption increased 9 percent.

He noted that Chinese consumption grew more than income, which happened only if the households reduced the savings share of their income, showing that consumer confidence was not weak.

"China will likely continue to contribute about a third of the world's economic growth while increasing its economic footprint," Lardy added.

He wrote about the third misconception — stubborn deflation has put China on a path to recession. He mentioned that core consumer prices, excluding food and energy, rose 0.7 percent last year. 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," he wrote.

The fourth misconception, Lardy said, "concerns the potential for a collapse in property investment". He said that this fear is not entirely misplaced but is exaggerated. Despite a noticeable decline in housing project launches in China since 2021, it is crucial to recognize that this shift isn't solely indicative of capital flight. Rather, developers are focusing 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 launches for the first time," Lardy wrote.

He said the fifth misconception was "that Chinese entrepreneurs are discouraged and moving their money out of the country". He said that "the pessimism is not supported by the data".

"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 is rising, with a total of 124 million enterprises employing about 300 million people.

Despite the "well-documented headwinds" that 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.

Gary Hufbauer, also a nonresident senior fellow at the Peterson Institute, told China Daily that he agrees with Lardy's positive evaluation of the status quo and outlook for 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," Midgley added.

yifanxu@chinadailyusa.com