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China Economy to Grow at Double US Pace Amid Underestimated Strength: Lardy

Pessimistic outlooks on China are based too heavily on misconceptions, blinding analysts to the country’s potential for massive growth in the future, according to economist Nicholas R. Lardy.

“China overcame even greater challenges when it embarked on the path of economic reform in the late 1970s. Although its growth has slowed in recent years, China is expected to grow twice as much faster than that of the United States in the years to come,” Lardy wrote. at Foreign Affairs on Tuesday.

He notes that while China’s GDP growth in 2023 appears modest compared to the double-digit growth seen in previous years, pessimists believe this means China is lagging behind the U.S. economy.

China’s nominal GDP grew 4.6% last year, outpaced by the 6.3% rise in the United States. But that changes by taking into account each country’s inflation or, in China’s case, disinflation, Lardy said. In this case, China’s GDP surpassed that of the United States, with growth of 5.2% and 2.5% respectively for each country.

Misconceptions around growth also come from the fact that Washington has aggressively tightened interest rates since 2022, while China has done the opposite, Lardy said. This depressed the Chinese yuan, eroding the value of its GDP measured in dollars.

But with a likely easing of U.S. policy, the yuan is expected to appreciate in the near term, Lardy added: “Its nominal GDP, measured in U.S. dollars, will almost certainly begin to converge toward that of the United States again this year and will likely exceed that of the United States. this in about a decade.

Lardy says Chinese investors are also getting it wrong when it comes to the country’s internal spending, with many fearing that consumers and businesses will prioritize savings above all else.

Instead, it notes that household consumption outpaced incomes last year, while Chinese companies increased debt and increased investment in manufacturing, mining, utilities and services.

At the same time, many are not entirely wrong to fear a collapse of investment in China’s vast real estate sector, even if that is exaggerated, Lardy wrote. For example, even though a dramatic decline in housing starts has occurred since 2021, it is not because money is fleeing.

Instead, developers focused more on completing housing projects, encouraged by government policy.

Others have also called China’s crackdown on private businesses a drag on growth, arguing that it has forced private investment to dry up and entrepreneurs to leave the country, Lardy said.

“Almost all of the decline in the private share of total investment after 2014 results from a correction in the real estate market, dominated by private companies,” he writes. “Excluding real estate, private investment increased by almost ten percent in 2023.”

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