Bloomberg
China May Never Get Rich
[snip]
Weighing these factors, DeLong comes to a stark conclusion --
China has only five years of rapid growth left. Since China's per capita GDP is now only about a quarter of the U.S. level, five years of 7 percent growth -- with the U.S. growing at 2 percent -- would leave China at less than a third of America's standard of living by the time it slows down.
That almost certainly seems too conservative. We need to take into account the effects of economic agglomeration. Agglomeration means that companies invest where there are large markets, and workers move to where they have job opportunities. This snowball effect, once started, is hard to stop. China's poor property rights will probably hold it back -- as will its large size and resource limitations -- but 30 percent of U.S. per-capita GDP is overly pessimistic.
I'd look for China to do at least as well as Malaysia, which now is at about 45 percent of U.S. GDP. That would mean China has more than a decade of 7 percent growth left, once it recovers from its recession.
That said, there are already signs that China's institutions are beginning to hold it back. In the wake of the country's dramatic stock market crash and the slow deflation of its real estate bubble,
zombie companies are starting to appear across the landscape. Zombie is the term for companies that are not really profitable, but that survive on a continuous stream of cheap loans from banks that can't afford to let the companies fail. Banks do this because if the companies fail, the banks fail, and the banks are both systemically important and politically well-connected. The government provides the final link in the chain, by bailing out banks, by keeping interest rates low, and by providing subsidies to some of the zombies.
This kind of trap ensnared the Japanese economy after its own bubble burst in the early 1990s. It took more than a decade before the administration of Prime Minister Junichiro Koizumi finally forced the big banks to cut most of their zombies loose.
But when Japan was attacked by zombies, it was at a much higher level of income (relative to the U.S.) than China enjoys today. In other words, China is hitting Japan-type institutional problems at a much earlier development level than Japan.
That is an early indicator that DeLong and other economists are probably right about China. The system of political-party-based property rights is better than nothing, but it isn't going to make China rich. China is still so poor that it isn't done growing for a while, but when it stops, it's probably not going to be a rich country.
https://www.bloomberg.com/view/articles/2015-09-04/china-may-never-get-rich
