Managing Globalization: How Fast China Grows Will Affect Everyone

Just how fast will the Chinese economy grow in the next 10, 20 or even 30 years? It is a topic of great disagreement even among experts, and not just because of the Chinese government's not-always-reliable statistics. It's also a crucial issue for all the other countries in the world, as the outcome will determine how much time they have to adapt to the stresses of Chinese purchasing and productive power.

At one end of the spectrum among Chinese economic prognosticators is James Trippon, an investment adviser to wealthy families and the editor of The China Stock Digest. Attentive viewers of 24-hour news networks may have seen Trippon last week predicting that China will overtake the United States as the biggest economy in the world within a mere 10 years.

That kind of jump would require the Chinese economy to expand by an average annual rate of 22 percent over the coming decade, were the U.S. economy to continue at its historical average of 3 percent to 3.5 percent. To understand how outlandish that figure sounds, consider that current official statistics have Chinese production increasing by around 8 percent to 10 percent a year, and many economists say Chinese growth will inevitably slow.

When reached later by telephone, Trippon softened his claim a little bit. "It may be a little bit bold, and maybe they won't achieve the growth rate," he said.

"Maybe it'll take them 15 years. But if it takes 15 years, you know what? We're not off by much."

Some microeconomic indicators, Trippon said, like purchases of new cars and spending on research and development, hint that China's growth might be much speedier than official statistics suggest. He also asserted that new businesses faced fewer regulatory hurdles in China than even in the capitalist-friendly United States.

But even if Trippon is right, maintaining growth of 22 percent a year for 10 years — or 15 percent for 15 years, if his alternative hypothesis is correct — would essentially require China to disobey what has come to be known as the law of economic convergence.

In mainstream economic theory, economies that are catching up to the leaders, in terms of living standards, inevitably decelerate. They start to face diminishing returns, and they run out of technologies and practices that can be copied from the leaders. In other words, they have to start innovating themselves, competing head-to- head with the leaders in the world's most advanced product markets.

It was convergence that motivated Dominic Wilson, senior global economist at Goldman Sachs, to predict that China, as well as Brazil, Russia and India, would see its growth rate drop over the next few decades. A report he published in October 2003 with Roopa Purushothaman stated that China's growth rate would fall steadily until it was roughly the same as that of the United States, somewhere around 2050.

Reached by phone last week, Wilson said he had been impressed by the pace of the Chinese economy since writing his report, but he was not willing to jump on Trippon's bandwagon.

"If you look at the way China's growing at the moment, and the kind of growth that we've seen since we'd done the report, it's pretty clear that it's growing more strongly than those projections implied," he said. "You could see China overtake the U.S. anywhere between 5 and 10 years earlier than we had originally projected."

That would put the lead change roughly 25 to 30 years out.

But Wilson held fast to the notion of convergence. "What I think is up for debate, depending on how optimistic you want to be, is how front- loaded that convergence process is going to be," he said.

The question is not academic. The faster China grows, the more stress it will exert on markets for raw materials, energy, corporate credit and all the other things it needs to support its expansion. The same goes for markets where China is a producer. Other countries that specialize in low-cost manufacturing will have much less time to adapt and compete if China's onrush follows Trippon's trend.

"There's no question," Wilson said, "that the difference between China growing at 10 percent for the next 10 to 15 years or 7 percent on average is a material difference to the way the world economy looks and the twists in goods and assets markets that you see already."

For that reason alone, it will be worth paying attention to the research generated by Trippon, Wilson and everyone in between.