It is easy these days to grab a headline about the end of peak China. China’s imminent economic stagnation is becoming conventional wisdom, unless of course one happens to be in the resources, energy, green industry, or automobile sectors, just to name a few. There, China’s demand continues to surge or, alternatively, depending on the sector, China’s capacity threatens extinction of foreign competitors.
The end of peak China story attracts a mix of ideologically motivated doomsayers who for decades have predicted the demise of China’s model, deeply believing it has been a house of cards all along. And geostrategic nostalgic types, who long for the return of the American-led order, which has been displaced by China’s relentless economic growth over the past four decades.
A just-released paper in Foreign Affairs by veteran American analyst of the Chinese economy, Nicholas Lardy, effectively puts the sword to all of this. Lardy shows how misreading the data on relative inflation, and interest and exchange rates, leads to the erroneous conclusion that China’s growth is falling behind that of the US.
He first points to the ‘paradox’ that while China’s GDP since 2019 fell from 76 per cent of the US’s to 67 per cent, China’s real GDP was 20 per cent higher than in 2019, while the US’s was only 8 per cent higher.
He explains the Lardy ‘paradox’ by differences in inflation and interest rates. For example, in 2023 China’s nominal GDP grew by 4.6 per cent but because of deflation its real GDP grew by 5.2 per cent. For the US, its nominal GDP grew by 6.3 per cent and its real GDP by only 2.5 per cent.
The US Federal Reserve has been raising interest rates since 2022 while, over the last year, China’s PBOC has been cutting them which has reversed........