Panda Bearishness

Double-digit annual GDP growth has become almost routine for China, but in the Financial Times, Kenneth Rogoff argues a slowdown may be in the offing:

China’s remarkable resilience to both the 2001 global recession and the 1997-98 Asian financial crisis has convinced almost everyone that another year of double-digit growth is all but inevitable. In fact, the odds of a significant growth recession in China – at least one year of sub-6 per cent growth – during the next couple of years are 50:50. With Chinese inflation spiking, notable backpedalling on market reforms and falling export demand, 2008 could be particularly challenging.

The bar is pretty high when 6% growth counts as a "growth recession" (a period of below average growth, but not a full-blown recession where output actually falls). In the "Economists' Forum" comments, Rogoff's former professor Jagdish Bhagwati reminds us of some institutional issues that could yet derail the China growth story:

I think that Rogoff's analysis needs to be supplemented by a fuller recognition of the problems that Chinese authoritarianism poses. Unless you have the institutions of a liberal democracy - a free press, NGOs, opposition parties and an independent judiciary - you run the danger of "social disruptions" that China has and you are unable to channel dissent and distress into creative political channels. This is why a big question mark hangs over China's future.

And William Easterly expects "regression to the mean":

Growth forecasters are curiously oblivious of the overwhelming evidence for regression to the mean. Of course, a small number of countries can defy gravity for a while, as China has already done with the length of its current rapid growth episode. Until recently, the East Asian tigers (Hong Kong, Korea, Singapore, Taiwan) also defied gravity for an unusually long period, but in the last ten years gravity reasserted itself - their growth has decelerated back down towards world average growth.

Or, to put it on a more solid theoretical footing - neoclassical growth models (e.g. the Solow model) imply that the rate of growth will slow as an economy gets closer to its steady state.

More Sino-pessimism is available from Michael Pettis, who considers the possibility of Chinese stagflation on his China financial markets blog.

Update (2/10): The Cleveland Fed's "Economic Trends" has a good explanation of the relationship between inflation and China's exchange rate policy.