- China will soon enter a deceleration stage as its growth rate slows
A key point to recognize in life is that no pattern is a straight line extrapolation of the past, regardless of how many people in the media want to argue that it is. Let’s look at China over the past couple of years, or more like a decade. With annual growth rates of about 10% every economist in the country was simply doing a little math predicting how many years it would take for China to overtake the United States as the number economy in the world in terms of GDP or gross domestic product. Strange when I was a young student, economists could think, now they are quant oriented. All they can do is extrapolate trends.
Well it just doesn’t work that way. Think for a moment about a few other predictions that were made during my lifetime. During the 1980’s there was the emergence of the Japanese super state with the belief that Japan would become the world’s number 1 economic power – never happened. During the late 1970’s there was a French politician named JJ Servan-Schreiber who wrote a book called the American Challenge. He postulated that Europe eventually would challenge the United States for economic power – it never happened.
There are other examples of straight line extrapolations that didn’t materialize. Microsoft certainly lost its hold on its market due to Google and others. Sony the number one consumer electronics player in the world has collapsed in the face of the Apple challenge. President Bush was supposed to lead a political conservative renaissance that would last for decades. It collapsed during the 2006 Congressional elections. Of course there was Alex Rodriquez who most believed would without question hold the home run record in baseball – not likely. My favorite was the inevitability of Tiger Woods with 14 majors dethroning Jack Nicholas with 18 majors – no longer likely with Wood’s mind out of the game, and young players not viewing him as invincible anymore.
So where does it leave China and why are the economists usually wrong? Growth is down to 8% from 10%. Nobody has studied history. Every time a country has created an economic miracle for itself something happens along the way that intrudes or certainly slows the whole process down. There is the emergence of the middle class and that middle class wants something. What they want is a portion of the growth taken from the growth of the economy and used for the consumer satisfaction of the middle class. In China today that middle class is concentrated throughout the coastal regions  with the interior of the country a massive wave of poverty the likes of which you cannot imagine. If the interior had the communications ability to realize how the coast was living there would be a revolt today.
When you look at super economies somewhere on the journey when per capital income reaches a range of $5000 to $15000 the country hits a wall. We saw this in Malaysia, again in Mexico, and now Brazil. There are three other examples of a $5000 wall in recent times. We mentioned Japan already, that was in the late 70’s, early 80’s, with Formosa aka Taiwan experiencing it during the 80’s and more recently South Korea in the 1990’s. In all three cases the growth rates of 9 to 10%, swiftly settled in at 5%.
During 2011 China hit the $5000 per capital level. I see this going to the 6 percent, maybe 7 percent level for the next several years, 5 no more than 10 years. This will be followed by a deceleration again because China will be even larger at that time. For those investors who put big bucks betting on 10% growth forever in China, they will be in for a rude awakening.
America will re-emerge stronger immediately after the Presidential election. Whoever wins doesn’t matter. We will begin the resolution of our budget deficits during a lame duck session of Congress between November and year end of this year. With the slowdown in China’s growth coming, oil prices will decline surprising everyone. For the last several years China has been responsible for 50% that’s right 50% of the growth in demand for oil. That’s coming to an end.
Studies have shown that if China grows by an additional 1% a year it adds a minimum of 10%, some argue 30% to oil prices. I believe as a result of the aforesaid that the US will go through a renaissance beginning next year. Chinese power will begin a classic shift into receding while America will ascend again. Remember the world including China sends their students to our colleges, not ours to theirs. American innovation will win out, and the culture of entitlements in this country will begin to be renegotiated and change. I for one am looking forward to what is ahead, which in my world portends Dow Jones 15000 in the not too distant future. Good luck.
Rich On Money
