More so than in recent years the debate about whether China can avoid the middle-income trap has recently assumed a high religious quality. Heretics point to an unsustainable growth model that isn’t being moved away from fast enough to allow China to shift down gears to a more orderly and sustained model. Believers respond that the authorities are aware of the issues and we should be wary of underestimating a government that has such a firm grasp on the levers required to be moved to produce necessary reforms.
This link will take you to the latest contribution to this debate and is from Wojcieck Maliszewski and Longmei Zhang of the IMF and was published in May this year. Maliszewski and Zhang identify a period of non-sustainable growth post the GFC which must now be paid for, inevitably, by slower growth. Moreover, as they point out, the closer China gets to the technology frontier the slower growth is likely to be. So, however the enchilada is sliced, slower growth is an inevitability for China. So far so consensual.
What the researchers add to the discussion though is a comparison with Korea, Taiwan and Japan over their respective economic transformation phases and from this they’re encouraged. As long as China can continue to open, reform and progress productive change there’s no reason why they should stumble into either economic stagnation or the middle-income trap. The question that no work can provide comfort on though is the biggest of all; can they make the changes?
Heretics and believers alike believe they have the correct answer; of course, no and yes respectively.
Investors though have an easier question to answer; what are we being asked to pay for at this point? That’s a much easier debate and one which a look at valuations provides the unequivocal answer* to.
Happy Sunday.
[*In case you missed it I addressed this in a post last Friday. You can access that at Here We Are Again]