WEALTH

MACRO
García-Herrero has one of those CVs that make
you feel you’ve wasted your life. In addition to
her day job, she serves as senior research fellow
at the European think tank BRUEGEL, nonresident
fellow at Cornell’s emerging market
research center, and is adjunct professor at
City University, Hong Kong. Among her other
credits, she has had stints as chief economist
for Emerging Markets at Banco Bilbao Vizcaya
Argentaria (BBVA), at the Bank of International
Settlements (BIS), and as a member of the
Counsel to the Executive Board of the European
Central Bank, as well as at the International
Monetary Fund.
THE SKY IS NOT FALLING
For her, it is inevitable – barring massive social
unrest or war – that China will not only double
its economy by 2020 (over 2010 and in line with
Beijing’s ambitious goals), but that it will again
double it by 2050. This is despite the country’s
posting in 2015 its worst GDP growth (6.9%) in
25 years. But then she has little time for
Chicken Little hedge funds in London or New
York. The simplified market equation that
assesses Chinese growth of xx.x% (insert your
preferred number) as resulting in either
economic stability or chaos, dodges the hard
work and time required to analyze the
complexities of modern China.
“Deeper scrutiny shows Chinese policies
can preserve economic stability in the
transformation to a more sustainable economic
growth model,” she explains. “But that doesn’t
mean it’s all rosy, because the way China
has doubled its income in the past is no
longer available.”
The way she sees it is that 2016 will be
crucial for China. The country is shifting
growth away from investment to consumption,
and its industrial base from basic manufacturing
to a medium-high technology level. But this is
occurring at a time when one of the engines of
growth, urbanization, is losing strength.
Over the past three decades, China
witnessed the biggest movement of humanity
seen in such a short period. More than 500
million people left the countryside; China’s
cities, now home to more than half the
country’s 1.35 billion people, are still growing
by the population of Belgium (11.3 million)
every year. However, this movement is slowing: roughly 70% of those that
will move have done so already. While 300–400 million may still shift,
the structural growth provided by urbanization is weakening.
“What we can expect for the next five years for China is cloudier than
what we have seen in the last five,” she reflects. Growth in China will be
slower, and rightly so, because that is the price that must be paid for
higher consumption ratios. As policy makers try to rebalance demand,
they cannot afford to reproduce the high growth rates of the past
because of an aversion to inflation.
OUT TO 2050
On a purchasing power parity basis, China is already the world’s largest
economy (at $19.92 trillion) and García-Herrero doesn’t expect this to
change. By 2050, she believes China will be far richer, that it will still be
the largest economy, but that it will also be extremely old. “China will
age dramatically,” she notes. “The labor force will decrease rapidly from
2016 onwards. From then on, more people will retire than enter the
workforce. By 2040, its population is projected to be 1.4 billion and China
will have 420 million over the age of 60, the majority of them retired.”
Such adverse demographics (see pages 52–53) will reduce potential
growth, she argues. As today’s older workers retire, and society finds too
few younger ones to replace them, this will commence a vicious circle of
rising wages, declining demand and deteriorating saving rates that will
also bring potential growth down.
Whether the economic power that China accumulates by then will
be enough to fund its growing pension and healthcare costs is an open
question and one that the country is scrambling now to address. With
China unlikely to be still running a currency surplus, García-Herrero
believes it will be forced to borrow abroad to support its dependents,
which it should do easily as the renminbi will be firmly established as
an international currency.
But then, as she willingly concedes, pundits such as herself have
been wrong in the past even on their short-term calls. China is just that
sort of place.
CHINA’S SLOWING ECONOMY
GDP growth
16%
14%
12%
10%
8%
6%
4%
1992
2001
China joins
WTO, firing up
export-led
growth
1994
1996
Source: bloomberg.com
1998
2007
Boom times as
exports meet
property
investment surge
20 0 0
20 02
2009
Exports
plunge on
global
recession
20 0 4
20 06
20 08
2010
Infrastucture
investment
surge spurs
pickup
2010
2012
2014
2015
Market
wobbles and
debt overhang
cloud outlook
2016
Allianz • 51