China Debate

Two of the greatest economic minds of our time have two different views on the Chinese economy. First, Jim O'Neill chief economist at Goldman Sachs who famously coined the term BRIC. He is bullish on the Chinese economy and feels that the global crisis helped China. The other economist is Nouriel Roubini famously called Dr. Doom, who is a little more skeptical of China and possibly rightfully so.

O'Neill feels the global crisis helped the Chinese economy. His main point is that with the global economy coming to a halt, China's export led economy took a hit. But it caused the Chinese to look inward and become less reliant on the American consumer. The number one long term problem for China is getting their consumption rate up. The Chinese sooner rather then later because of the crisis have been forced to become more reliant on there own domestic demand.

Nouriel Roubini on the other hand has the view that the jury is not out on the Chinese economy. During the global recession of 2009, the Chinese managed to grow 8 percent. This astounding growth rate did not come from their usual export growth because the global consumer was no where to be found. More troubling is the fact that consumption as a percentage of GDP stayed the same at a very low 35 percent. Therefore it appears that the bulk of the growth came from fixed asset investment and easy monetary policy. The first is just not a sustainable way to grow the economy. Just ask the leaders of the old Soviet Union. The latter, easy monetary policy, could possibly have lasting implications through inflation and asset bubbles.

These are two of the most original thinkers in economics having pretty much two opposing view points. I think if you look at this from a micro perspective one would tend to want to sign with Roubini and the raw data he provided signaling the consumer in China is still not ready to spend. However, if you look at it from a more macro view, O'Neill's thesis about the crisis helping China is very persuadable.

I tend to feel that there will be many bumps and bruises over the next decade in China. However, the long term growth story in China is intact as the hundreds of millions of rural Chinese start urbanizing and becoming more productive and consumer oriented. The Chinese policy makers are very bright and are beginning to form programs that will instill consumer confidence. Safety nets have to be put in place in order to get the consumption rate up in China. Time will tell which economist is right.