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China – what next?

| Posted by: Paul Donovan | Tags: Paul Donovan Weekly

  • The BRIC economies were grouped in 2001. The concept was great marketing. Economically, the analysis was less great. In 2001, BRIC countries averaged 2% of the world economy each. Today, Brazil, Russia and India average 2.3% of the world economy each. China is 15% of the world economy.
  • It was never BRIC. It was C.
  • After this success, what is next for China and the world? China's model over the past twenty years cannot continue. The globalization that brought real trade to a record 23% of real GDP was about outsourcing to longer supply chains, benefiting China. Technology and localization undermine that model today. China's "Made in China 2025" plan should reflect this.
  • China's recent growth has been debt fueled. The debt level is not alarming. Debt is domestic financed, serving as an inter-generational wealth transfer. The growth in debt is unsustainable. As China seeks to stabilize debt to GDP ratios, it will have to accept slower economic growth.
  • Demographics and productivity argue that China's trend growth rate will decline. The trend growth rate is likely to be closer to 5% than to 7% over the next decade. This increases the importance of raising the consumers' share of the economy. A rising consumer share means living standards grow faster than GDP. That should create a stable social outcome.