A recent Tweets by Michael Pettis has me reflecting on a bet he made with the Economist in 2012 about when China would overtake the US on nominal GDP.
Economist 2012 Predictions
- China would overtake the US in Nominal GDP by 2018
- China would average 7.75 percent real (inflation adjusted growth) vs 2.5 percent for the US.
- The Yuan would appreciate 3 percent per year vs the US dollar.
I wrote about the silliness of the the Economist’s call in 2012 which appears below. First let’s take a look at some recent Tweets and the current predicament of China.
China’s Decline Started Decades Ago
“”It would be wrong to think that external factors have radically altered China’s prospects. Rather, the country’s gradual decline started more than a decade ago,” says political economist and sociologist, Ho-fung Hung, JHU.
Michael Pettis agrees, and said so back in 2012 and likely much further.
Where China Went Wrong
On August 5, 2023, Pettis did a 14-Tweet take on where China went wrong.
Debt in State Owned Enterprises SOEs
Misunderstanding Cause and Effect
Excessively High GDP Targets is the Cause of China’s Mess
Debt Had to Surge to Meet Targets
US Debt Will Continue to Rise Too
Debt Has to Go Somewhere
“As long as Beijing continues to set excessively high GDP growth targets, forcing hard budget constraints onto SOEs and LGFVs will not address China’s debt problem. It will merely shift the locus of debt creation, perhaps even into riskier forms.”
The Solution (From a Different Tweet Thread)
Huge Credit Stress Starting in China May Easily Rock the Whole World
On September 20, 2021 I commented Huge Credit Stress Starting in China May Easily Rock the Whole World
My 2021 post included another set of Tweets from Pettis. Here is a key one, as we wind our way back to 2012.
Michael Pettis Chimes in China’s Growth and Debt
Flashback November 22, 2020: Michael Pettis Chimes in China’s Growth and Debt
Beijing’s goal of doubling GDP by 2035 requires very rapid growth in debt, so much so that after a few years I am pretty sure they’ll quietly abandon that goal.
Pettis’ 2012 Bet With the Economist
These Economist articles are paywalled, but I can fill in some pieces and will do so shortly.
Economist December 27, 2011: The Dating Game
We invite you to predict when China will overtake America
AMERICA’S GDP is still roughly twice as big as China’s (using market exchange rates). To predict when the gap might be closed, The Economist has updated its interactive chart below with the latest GDP numbers. This allows you to plug in your own assumptions about real GDP growth in China and America, inflation rates and the yuan’s exchange rate against the dollar. Over the past ten years, real GDP growth averaged 10.5% a year in China and 1.6% in America; inflation (as measured by the GDP deflator) averaged 4.3% and 2.2% respectively. Since Beijing scrapped its dollar peg in 2005, the yuan has risen by an annual average of just over 4%. Our best guess for the next decade is that annual GDP growth averages 7.75% in China and 2.5% in America, inflation rates average 4% and 1.5%, and the yuan appreciates by 3% a year. Plug in these numbers and China will overtake America in 2018. Alternatively, if China’s real growth rate slows to an average of only 5%, then (leaving the other assumptions unchanged) it would not become number one until 2021. What do you think?
What Do I think?
That the economist was nuts and I said so at the time.
Pettis challenged the Economist to a bet and the Economist accepted.
Economist March 31, 2012: Wanna Bet?
WILL the Chinese economy surpass America’s before the end of this decade? Michael Pettis, a professor at Peking University who has long been bearish on the Chinese economy, has bet the Economist that it won’t. Our Free Exchange blog has taken up the bet and countered with another: that Chinese GDP will grow faster than Mr Pettis’s prediction of an average 3% a year this decade. What do you think?
Michael Pettis has challenged us to a bet.
For those of you who don’t know him, Mr Pettis is a finance professor at Peking University’s Guanghua School of Management and a frequent blogger. He would like to bet that China’s dollar GDP (calculated at market exchange rates) will NOT surpass America’s in 2018. That is the year that China’s economy will overtake America’s if you stick with the default assumptions in our most recent* interactive chart, which allows you to plug in your own guesstimates** of future growth and inflation in the two countries, as well as the exchange rate between them.***
The Dating Game: Michael Pettis Challenges The Economist to a Bet on China
I can fill in pieces because if was happening at the time, I was likely writing about it, and this is no exception.
Somehow my original post never migrated to my current blog, but here is my original GlobalEconomicAnalysis post The Dating Game: Michael Pettis Challenges The Economist to a Bet on China
I share a viewpoint with Pettis that The Economist is way too generous in their estimate of real GDP growth for China.
Pettis thinks China will average 3% growth and I already posted I found that number reasonable. As far as Yuan appreciation is concerned, I am not at all convinced the Yuan is undervalued at all, yet I plugged in a nominal 2% annual appreciation.
Assuming a “Real GDP growth” of 3% and Inflation at 4% yields a chart that looks like the one below.
Mish 2012 Conclusion
Even still, I wonder if the year 2030 is still far too optimistic from the standpoint of China.
I strongly believe peak oil and energy consumption is going to put a serious damper on Chinese growth, and that is on top a necessary and very painful shift away from an entirely unsustainable growth model based on exports, housing, and fixed investment.
I share Pettis’ view regarding “inflated GDP numbers, an over-investment boom, and the unstable range of political outcomes” adding my own energy concerns and yuan valuation concerns on top of it all.
I find the arguments by Pettis, the ECRI, and Chanos compelling. Add to that the restraint of peak oil coupled with potential political instability and the proper conclusion is that long-term Chinese growth of 7.5% is Fantasyland material.
USD vs Chinese Yuan
Unfortunately, I did not do a calculation of the yuan barely appreciating despite my statement “I am not at all convinced the Yuan is undervalued at all”.
It would have been interesting to see the result.
But at 3 percent growth and 2 percent yuan appreciation, it would have taken until 2030 for China to surpass the US.
In 2011, one dollar bought 6.5 yuan in 2011. Today 1 dollar buys 7.2 yuan. That’s a yuan depreciation of 9.7 percent.
A gain of 2 percent a year for 12 years would be total appreciation of 26.8 percent. A gain of 3 percent a year for 12 years would be 42.6 percent rise. Instead the yuan depreciated.
Beware the Huge Negative Lag Impact of Three Rounds of Covid Stimulus
Meanwhile, back in the US, Beware the Huge Negative Lag Impact of Three Rounds of Covid Stimulus
Nearly everyone is still on a sugar high from three rounds of monstrous fiscal stimulus during the Covid pandemic.
I don’t buy it and neither does Lacy Hunt.
Gold-Backed BRIC Silliness
Launching a BRIC currency is, for now, somewhere between extremely difficult and impossible, in any meaningful sense.
I explain in detail in More Gold Backed BRIC Currency Silliness on Dethroning the Dollar
Looking for Deflation? Cast Your Eyes on China, Not the US
Finally, let’s review deflation risk. On August 1, I commented Looking for Deflation? Cast Your Eyes on China, Not the US
Every “rah rah ” bet on China has blown up for decades. So will silliness on the BRIC.
Correction
In a rush to meet someone for a hike this morning (just got back now), I inadvertently did the Yuan calculation the wrong way. It has depreciated vs the US dollar, not the gain I reported.
The math above has been revised.
the best comparative measure of national economies is widely accepted to be Purchasing Power Parity (PPP). comparison of nominal GDP by converting all output to dollar equivalents is not meaningful. PPP GDP captures the real productive value of an economy.
by PPP, China’s economy surpassed that of the U.S. several years ago and is substantially larger.
Country (or territory) Region IMF[1][5] World Bank[6] CIA[7][8][9]
Estimate Year Estimate Year Estimate Year
World — 174,471,283 2023 164,155,327 2022 127,800,000 2017
China Asia 33,014,998 [n 1]2023 30,327,320 [n 2]2022 23,009,780 [n 1]2020
United States Americas 26,854,599 2023 25,462,700 2022 19,846,720 2020
both the IMF and the World Bank recognize that China’s economy is larger than that of the U.S. only the CIA,which for obvious political reasons continues to cling to nominal GDP measure, offers a different conclusion.
The economist made the bet as stated, and lost badly.
Pettis does not believe PPP is the best measure and neither do I.
And to top it off, the Economist expected huge appreciation in the RMB and instead it tanked.
He won a bet. Big whoop. PPP is far superior than gdp. Also common sense. China is better off by long shot than they were decades ago. Not USA. The common middle brow. I’m talking about. Also it’s a dumb thing to even say what’s bigger. By so many measures it differs. This ain’t sports or junior high popularity contest.
It will happen in about 10 years, as that is the time it will take for the establishment to utterly destroy an economy dependent on fossil fuels and freedom. China and Russia are not stupid enough to pursue the climate change hoax, but the Neocons are stupid enough to start a war to try to make them conform.
X
An RV park opened on the edge of my neighborhood. I was not happy about it at first but the place is amazing. Lush green park, walking trail, pool, rec center with a nice gym. And all the RV’s are clean and most are massive.
Does China have anything like that? Or how about single family homes 2500-4000K sq ft with pools, outdoor grills, nice patio furniture in damn near over minor city…meh.
No they do not. China is not surpassing anyone until the standard of living goes up drastically for the average person and also regulations. That RV park near me took years of planning taking into consideration a large bag of factors. China may appear to be winning on some fronts but they are not winning. When I am willing to trade my lifestyle for their lifestyle that’s when they pass us. Not happening anytime soon.
Does China have anything like that? Or how about single family homes 2500-4000K sq ft with pools, outdoor grills, nice patio furniture in damn near over minor city…meh.
——-
Buddy.
you should spend less time in front in tv dreaming, and more time traveling
in USA or abroad.
when was last time you were in SF, Chicago, NY, et cetc. or pretty much any of big cities in USA? they look like a s$$hit. and getting worse.
on other hand you wont find anything in china near like situation in Chicago or SF!
and if you analyse progress in china for last 30 years you will be amazed.
alx
ps
as most of USA people you probabaly never traveled outside USA ever, or know foreign language, am i right?
My wife traveled to China recently. She was told not to eat out in town. The restrooms at the plant she was visiting the workers were using holes in the ground. The management though had toilets.
Where is this situation in the US? There is no situation like this in the US. I can go to podunk Louisiana and find working toilets everywhere. Same for Mississippi.
I know this fact is very difficult for you to comprehend but 1.4 billion people do not have flushing toilets and most of them are in China, not the US. I have traveled a lot being retired military and have seen much of the same throughout my travels. The rest of the worlds lives like s*** and that is a fact.
Spit oil on that one for a minute.
https://en.wikipedia.org/wiki/List_of_countries_by_motor_vehicle_production
China makes the most cars in the world, by far. And they make the most EVs, by far. They are going to completely dominate the car industry. They used to make low end cars, but now they make some of the best cars. The biggest industry in Europe and Japan is automobiles. Nothing else comes close. Neither knows how to make EVs. Our biggest allies are going to suffer a huge economic collapse. We’ll tariff Chinese cars, but that’s not going to stop them from selling everywhere else. Ford and GM can’t survive on the US pickup market alone.
The only true measure is ENERGY. Energy follows the laws of nature and can’t be tempered with like money. GDP and manufacturing output are just proxies. One
might say that the US has more technology-based economy and that’s why manufacturing output can’t be the measure. But energy levels all that. The technology-based economy requires a lot more energy, from the process to obtain raw materials to the more skill level work base. In that measure China is already 65% bigger than the US (https://worldpopulationreview.com/country-rankings/energy-consumption-by-country).
So why US still is the leader? One might say is because of Dolar as a reserve currency status and the power to leverage that. Well Russia is proving that this is not the case anymore, sanctions are not effective as they used to be.
For me is because of the inertia on the credibility of the US. The US is slowly losing it, first in energy, then in currency status, then in military. It will take decades for China to overtake US credibility if that ever happens, but today China has a bigger energy output then the US.
=l (inflation adjusted growth)
what uf$$ck us inflation adjusted growth???
china overtook USA many many many years ago.
IT IS CALLED POPULATION!
thre are about 1.5 bln in china and 330+ mil in usa.
1.5 bln consumer more: cars, houses, food, oil, gas, electr. metals, phones etc etc
++
out of 260 mil working age in USA 95 MIL DONT WORK!
I doubt it is possible to live in china sukcing gov ti$ts!
——–
++ china is stable. china has pretty much homogenous poopulation united by culture and history (outside some hot spots in tibet and west china)
of course, 1 party rule, and gov run economy is worse than free capitalistic system, but overall china economy is getting by!
———-
on other hand USA has giant social cohesion issues, black-white, new immigrants,
and somehow USA political class doesn’t want country to prosper!
I wonder why.
——
so overall USA gov debt, war expenses, and social cohesion issues WILL SINK USA in 10-20 years!
i doubt anything bad will happen to china in such small time period!
If you’re a serious economic writer how do you get something like that backwards? I stopped reading right there. It was jarring. Discussing the weakening RMB while showing it as strengthening is hard to think of as a simple mistake. Very odd.
How?
I was in a hurry.
I correct mistakes. I am glad to learn you have never done such a thing. Some of us are perfect, You are one of them.
Congrats.
Sorry about the tone of that comment. To use a sports cliché, in terms of breadth of knowledge and productivity I couldn’t carry your jock. The flipped USD/CYN pair just tilted me for a moment. Keep up the good work.
Hey Mish – you have this the wrong way around: It took 6.5 dollars to buy a yuan in 2011. It takes 7.2 dollars today. That’s a total appreciation of 10.8 Percent.
It’s 1 dollar bought, 6.5 Yuan. Now 1 dollar buys 7.2 yuan. That’s depreciation of the RMB.
Hey Mish I was wondering why in your fairly new format, why you don’t post the newest comments first the way you used to, or maybe it’s because the higher quality more sophisticated comments usually always seem to show up early, and us dumber comments come along a little later.
Bezo and Waltons etc buying there and selling here. Is there a mystery to this?
China’s middle class growth will only inhibit it’s export driven economy because the cost of living is too great for factory jobs. The current generation of workers shun factory work because they spent time and money going to college. A country that transitions from one of low cost labor to middle class gets caught in the middle income trap. The same thing happened in the US, Europe, Korea, Taiwan, Japan, etc. Hence, there are very few qualified factory workers let alone people willing to work in a factory.
Our crumbling empire de-risk the Chinese trade. If we want Taiwan to stay with us we cannot hollow up Taiwan. We expand our industrial and high tech capacities. It might lead to over capacity and lower prices. Intel and NVDA might produce chips that nobody needs or wants, especially during recessions. Our gov might subsidize the chip industry for decades.
It is very simple. China will never take over the US until it becomes a truly open, free and Democratic economy.
There is nothing magic about ‘a truly open, free and Democratic economy’. Italy has that, Spain has that, Portugal has that, and none are successful. Half of US GDP is government spending.
Free market capitalism has enriched more people worldwide than any other system. It’s the single best economic system. It is the heavy incompetent and corrupt hand of government that creates problems .
Would the “Free market capitalism” still be the best economic system if it is the same one that caused government incompetence and corruption?
When the big corporations use their “donation” to lobby the government, is there really anything democratic? Or it’s rather plutocracy?
taly has that, Spain has that, Portugal has that, and none are successful
—-
sure .!! spain dictator franko died in middle of 1970xxx
spain was about like USSR after ww2 during Franko regime. only small one!
so nobody gave a y$uck!
There has never been any such thing.
What if the US ceases to be a free democracy? Seems the democrats are hell bent on ending free elections in the US.
AS others noted. PPP is the only proper measurement. or use a smell test. are the vast majority of chinese better off today versus 2012, 2002, 1992. how about the vast majority of americans. i think we know the answer. also what’s missed is much of the us debt and currency the chinese have has been layed off in very long term installment purchases of raw materials and ports and much more, for decades to come. would i want to live in a prosperous totalitarian empire, or a much more free crumbling war mongering empire like ours. i’d pick usa. though there are many spots on planet earth that one’s PPP could improve drastically and still live fairly free and in safe areas and cities and seashores of the planet. comparing GDP is silly. it’s like sports. meaningless. i really don’t care if the jets do well this season. doesn’t mean anything to my life. same with GDP.
= PPP is the only proper measurement.
not really. 1! simple physical consumption : cars, phones, houses etv per capita
is the best!!
you dont need to INCLUDE PRICES IN analysis!! what for?
if people are buying price is right.
Inflation cracked Egypt’s explosive 100M population. Those without vitamin P to the Gov and the military industry are doomed. Youth unemployment is high. Egypt exports young immigrants, their excess population, to the world. They send dollars or Euros back home. In London 1 out of 5 newly born babies names is Muhammed.
The Chinese saving rate is high. In 2008 the POBC raided people saving
accounts, when the dollar hit nadir, to buy coal, steel and other commodities…
When the Chinese econ was shut down the PBOC raided to stimulate the econ , for a hollowed IOU. No printing. System control with a positive feedback loop.
You got the US$/ RMB exchange reversed. It now takes over 7 RMB to purchase 1US$. The RMB is now weaker than previously stated, and I suspect the RMB is substantially weaker than official rates given.
The USD/RMB conversion rate is abnormal/temporary at the moment when Fed raises interest rates by 5% within a year, manually causing a scarcity of dollar all over the world.
USD will be substantially weaker once Fed reverses course, on top of the now unlimited debt cap. Last time I checked, the national debt now sits at 32 trillion.
According to PPP, the US is already #2
https://www.visualcapitalist.com/visualizing-the-composition-of-the-world-economy-by-gdp-ppp/
GDP is a ridiculous way to assess the size and health of an economy. The government can borrow and spend $1Trillion on stupid, government “make work” and this capital destruction is counted as a $1 Trillion addition to the GDP. I think manufacturing is a key to financial health, and in this China is kicking our butts.
Agreed. Plus on a PPP basis the Chinese economy is larger than the US.
But China has huge problems, an aging and declining population, an overreliance on construction to boost GDP and to create millions of jobs both in construction and in suppliers like steel mills for rebars. If the population is declining then who will occupy the tens of millions of empty apartments?
But then Chinas problems will create problems everywhere. For example here in Australia we depend on China to buy our iron ore, our coal and hundreds of other minerals and ag produce. China gets a cold and Australia will get pneumonia.
Every country has problems. China’s are simply different.
Alex: ” I think manufacturing is a key to financial health”
In an earlier day you could have said “I think *farming* is the key to financial health”. And, that statement would probably get a lot more nodded heads, given that humans have 200+ generations of breeding to feel farming is key.
Farming is still important. Manufacturing is still important. We don’t have a good word for what became more important recently. We even think of outfits like Amazon as companies that don’t *make* anything! Like their web site isn’t real, like, say, a truck transmission. Silly thinking, but there it is.
This is all kinda a nit. But I think it’s important to keep this sort of thing in mind, else our thoughts may mislead us.
OK, let take away everything that is produced and manufactured what do you have? IPhones and iPads are manufactured in China as are the chips (TSM). Yes Taiwan is China. With Chinese products those Amazon warehouses are empty.
As NATO is finding out in Ukraine, the ability to manufacture motions also matters.
We are so far up Maslow’s hierarchy ofneedsweforgwt all the things below us that makes life so easy.
I strongly suspect you are right. When you look at satellite imagery of China, the construction is astounding. Just their coastline alone, is almost completely changed by manmade construction with new seaports, nuclear power plants, military bases, skyscrapers, highways, airports, and other infrastructure. It’s on a scale that has never been seen before.
Yes and how many of them are crumbling?
China already took over United States in GDP – PPP adjusted around 2015.
PPP is a stupid measure and the Economist paid off
GDP is a silly measure too! As are most government statistics.
It’s not perfect. It’s the best measure economists have. It is stupid to judge a person’s education by the qualification he possess, but it is the best measure.
Mish the US spends more money on Defense than the next 5 countries combined. I guess that means we have the best military and best military equipment. But wait, Russia with its puny military budget is kicking NATO butt. Russians are out producing NATO by a wide margin. How is that?
Come on. The US and NATO are just sending surplus arms to Ukraine. We’re not seriously fighting the Russians. We think Russia is going to run out of money and collapse. Doesn’t seem likely.
I agree. China makes stuff for 1.4 billion people and they’re a big net exporter. The US has a quarter their population and we’re a big net importer. China clearly has a bigger economy. Our economic numbers are bloated BS.
¿Nothing to say about state owned compamies in China? And, worst of all, army owned companies. Corruption and bad management make impossible a sustained long term healthy economy.
I’m still waiting to see that marvelous chinese covid vaccine. Or the russian and cuban vaccines, by the way…
Not sure about the west’s marvelous Covid vaccine. In my experience and research it was quite ineffective and quite possibly
Dangerous.
It is now undeniable that the covid jab is not only dangerous and deadly. I am dumbfounded why more parents of dead kids and kids that have suffered heart attacks/heart problems are not speaking up more. I can’t believe they are still drinking the Kool-Aid. How about you Mish, are you still drinking the Kool-Aid on the vax? I haven’t heard much from you since you were such an early advocate for the experimental vax.
Like our government is not inbed with corporate America.
Let’s look at our news outlets, or communication channels or social enterprises.
Let’s go Brandon!
There’s one thing worse than army owned companies, and that is the infamous military-industrial complex here in the United States.
=t marvelous chinese covid vaccine
it is in russia. YOU CAN have shot if youwant .
not sure about in USa.!! safety of .
——-
++ USa spends 2x more per capita on medicine than G7 countries!
result . at best is middle of pack!!
40pct of american are OBESE.!
Mish, you misquoted the USDCNY exchange rate. it takes $1 to buy 7.20 CNY right now, you have it written the other way around. but otherwise, I concur that China has likely peaked and that they may never catch the US in terms of nominal GDP overall
=I concur that China has likely peaked
what made you think you know anything about china, or 1.5 bln people in china, or
condition of biggest ind. colossus in human history TO EVEN PRETEND you know about future events in china ?
fancy to bet on next superball? you must be insane rich by betting on future !!
I think I read somewhere that central government economic planning doesn’t work. The Chinese need more corrupt crony capitalism like we have. They are catching on though as they have shown by bribing the Brandon crime family.
Toot toot!
Thanks for announcing yourself. Start a go fund me for that lobotomy you are desperately in need of. I’ll donate.
https://www.zerohedge.com/economics/biden-energy-secretary-secretly-consulted-top-chinese-energy-official-spr-release-sales
I know your a Brandon fan. Enjoy
Toot toot!
Central planning failed in the USSR. The economic growth without central planning in the US frustrated leaders in the USSR. The USSR religiously believed their models were absolutely correct that they wouldn’t even consider alternatives even when the data was right in front of them.
= the US frustrated leaders in the USSR
yeah , somehow thye were on par w/ USA in space research and exploration, and
have same size airship industry. way ahead of europe or japan.
——
in USSR they knew none about own country, so any USA info was pure propaganda in ussr.
it was not planning, but lack of private property sank USSR.
It was grift…. Same as is happening to us.
China has managed the seemingly impossible feat of combining the worst aspects of socialism and capitalism (so, yes, the crony kind).
We’re right there too with our hilarious healthcare system, of course.
There is a major difference between central government planning and industrial policies.
For example, the most recent EV boom in China is the exact result of years of industrial policies, and they are apparently working.
China just took over Japan as the largest car manufacturer/exporter in Q2 2023.
They recently became the largest exporter. They’ve been the biggest manufacturer for a while. European car makers are shifting production to China because they don’t know how to make EVs cheaply. Chinese companies will make the cars and the Europeans will put their logos on them. I doubt people will be willing paying a big markup for a logo for very long.
=government economic planning
every counry have economic planning ! it is called taxes. and gov budget.
overall fed+state govs are responsible for from 40 pct (in usa ) to over 70 pct in europe countries.
USA military+ nat. security budget is over 1 trln. it is about in top 20 countries in world
by nominal gdp.
diff between USA and former USSR was not planning but lack of private property.
that is all!!