Macquarie’s magnificent Viktor Schvets on the tough choices facing China:
While quantifying grow this always more of an art than a science, in China it is even more so. Based on the Soviet-style production and growth targets (vs expenditure derived ex-post estimates elsewhere), China’s economic results are even more opaque than usual. This has created a vibrant field of studies, with views ranging from China soon overtaking the US to China being a ‘Paper Tiger’.
At the heart of this debate is the productivity trajectory, and ability of China to improve efficiency while satisfying a myriad of social and political objectives. Depending on methodology employed, China’s TFP (or Total Factor Productivity, after excluding contribution of labour and capital) has either already gone negative or has suffered from a significant slowdown. One of the best sources of productivity data (i.e.,Conference Board–TED) has alternative measures that show not only a far more volatile trajectory of China’s GDP (vs smooth official numbers) but also that China’s TFP essentially stop growing a decade ago. Even official estimates show a sharp contraction in TFP from 5%-6% in the ’90s to 2.8% pre-COVID. Most other estimates fall in between these extremes, but all highlight slower gains, as relocation of labour to higher productivity sectors has been largely completed, and it is now moving into lower productivity services. The same trends are also evident in simpler indicators (e.g.,output per employee).
