Geoff Raby departs with undying love for China

At the AFR comes thankfully the last column by registered agent of foreign influence and Chinese coal director Geoff Raby:

The holiday period is a good time to catch up on both sleep and reading. One of the previous year’s most important books, which inexplicably has received scant attention, is Tom Orlik’s China: The Bubble that Never Pops. With respect to writings on China, it should have been the book of the year.

—The global tipping point in economic predominance has been passed and China’s economic power relative to both the US and rest of the world will grow massively. This is the big geopolitical story in the years ahead.

Expert commentators were always predicting – and still are – that China’s growth “bubble” would imminently burst. Certainly, Beijing has given the Cassandras plenty of material with which to work, notably its rapidly increasing levels of debt.

…Orlik argues, however, that China has consistently confounded the pessimists. He says, “to read the history of modern China is to read the history of collapse theories”.

…After my 35 years of analysing, commenting on, advising and doing business with China, it is hard not to give China’s policymakers the benefit of the doubt.

Viewing the Chinese economy through the prism of endless boom or imminent bust is an intellectually lazy, false binary.

Development economics understands China well. For decades it has traversed the classic catch-up growth phase followed by many emerging economies. This period keeps labour costs low to develop export markets and investment levels high because there are so many excellent opportunities.

At a certain moment, this model starts to stutter as labour costs increase and investment opportunities fade. This is called the Lewis Turning Point. China has been passing through it now for the better part of a decade.

Beyond that, the classic development path is a period of accelerating growth in wages and rising consumption, as well as a move up the export value chain. These offset declines in low-end exports, as well as investment. See the history of South Korea and Japan.

These processes are all well understood by development economists. Indeed, they were accurately described by Xi Jinping when he rose to power in 2011 as he began a giant “structural rebalancing” of Chinese growth away from investment and towards consumption.

Alas, the good tyrant discovered that it is not so easy when you have too large an economy to support global export dominance, an under-developed social safety net plus a rapidly aging population to support consumption, and investment structures hugely dependent upon public sponsorship and cheap credit.

Following Xi’s reform efforts, growth cratered, perhaps most eloquently expressed in a $38 iron ore price, and he was forced to backtrack just as quickly. Ever since, China has thrown one stimulus Hail Mary after another to keep its growth level elevated lest the slowing jeopardise CCP power.

But this is not a success, it is kicking the can. Do that too much and you fail to lift export sophistication enough, wages and consumption stagnate, and debt ratios plus servicing costs keep mushrooming as malinvestment piles up.

China is well down that path now. Which is also well understood. The path ends with Japanifcation and low growth permanently, made even more certain by China’s similar demographics. The sliding Chinese GDP chart says it all:

There doesn’t need to be a bust, indeed, almost certainly won’t be given China owns its banks. But by 2030, it will still stagnate to Western levels of growth and, when we throw in that it calculates its GDP differently, never writing down its bad investments, in real terms it will be struggling to grow at all.

How this equates to the notion that “China’s economic power relative to both the US and rest of the world will grow massively” is not obvious.

Rather, what we can expect is that as CCP economic legitimacy fades it will turn increasingly to tyranny, nationalism and eternal hostility to fill the gap.

As the dictator absorbs Hong Kong, unleashes wolf warriors, and prepares all manner of insults to freedom, Xi Jinping seems to understand this much better than does Geoff Raby.

Houses and Holes
Latest posts by Houses and Holes (see all)


  1. The other variable is that China won’t be permitted to continue to outgrow the West. The US simply won’t allow it. There’s a solid argument that Japanese was deliberately neutered by the West because it was getting too big for its boots. It certainly looks like that’s all playing out again vis China.

  2. A Bulgarian economist friend of mine whose working at Goldman once said to me at a lunch in Singapore “never underestimate how large a bubble a communist political system can blow, it doesn’t have the checks and balances of a Democratic system and consequently things can get seriously extreme before it goes…”

    I’ve just finished writing a four part note on China based on the IMF Article IV. They manage to keep the system together because inflation is at bay, savings rates are high, they have a closed capital account and they use financial repression to ensure the system is funded. But debt levels continue to explode and the return on capital continues to fall. They may or may not experience a crash, but they are definitely ‘Japanisimg’ and the Middle Income Trap awaits.

    Just because it hasn’t happened yet, doesn’t mean budget constraints don’t apply.