Morningstar Magazine - December 2017/January 2018 - 42

Strategies

China Is Running Out of Cheap Growth
The economy will soon exhaust its sources
of easy productivity gains.

Tax Wise
7 Ways Software Helps Clients
Manage Taxes

Investing Over the Lifecycle, Part II

Emerging Markets: The Evolution
of Emerging Markets

Manager: Consistently Opportunistic
Passive: Small Cap, Wide Range
Equity: Vornado Takes Manhattan

Quant U

Investment Research

Best Ideas
56
57

RESEARCH

Dan Rohr

This article is the second in a series on China's
next 10 years.
Ever since China's economy began to slow
from last decade's double-digit pace, investors
have quarreled over the country's growth
prospects. At various times in the past several
years, bulls and bears have each glimpsed
apparent victory, only for a reversal of China's
credit cycle to hand narrative momentum
to the other side. The long-term outlook remains
unsettled, and the debate continues.
Perhaps no question matters more to investors
globally. Over the past 10 years, China has
been the single largest contributor to global GDP
growth, accounting for nearly one third of
the world total. Meanwhile, China has become
the world's biggest buyer of everything from
automobiles to airplanes to oral hygiene products.
The bullish side of the debate often points to
China's remaining potential for "catch-up" growth,
which should portend slower, albeit robust
growth for many years to come. As a whole, China
remains poorer and more agrarian than rich
countries. Within China, there's scope for catch-up,
too. Interior provinces are far less developed
than their coastal peers. Prominent bull Justin Yifu
Lin, former chief economist at the World Bank
and longtime advisor to top leadership in Beijing,

has long cited China's relative poverty as the
biggest reason for his optimism.1 He notes
that Japan, Singapore, Taiwan, and South Korea
all enjoyed decades of 7%-plus GDP growth
after they had reached the rung on the income
ladder that China finds itself at today.
Others are more circumspect. Over the past
half-century, the typical country at China's income
level posted 4% average annual GDP growth
in the 10 years that followed. That's well below the
consensus medium-term outlook for China
of roughly 6%, as well as Beijing's goal of 6.4%
through 2020. Bears fret that even an "average"
outcome would be optimistic, given the
excesses that have built up following repeated
rounds of stimulus and the disappointing
pace of reform.
This article continues our series on China's
next 10 years with our take on the growth debate.2
We aim to look beyond prevailing trends
and recent headlines that tend to dominate the
discussion. Our long-term orientation requires
a different focus: the rich academic literature on
economic development, the history of other
countries that encountered many of the challenges
China faces today, and the role China's
political economy may play in promoting or
inhibiting growth.
In this article, we'll probe the sources of China's
multiyear slowdown. Why, exactly, has growth
slowed? Are the underlying causes of the
slowdown likely to persist, abate, or worsen?

1 Lin, J.Y. 2013. "Long Live China's Boom," Project Syndicate, Aug. 5.
2 Our first article focused on the economic implications of demographic change, including detailed analysis of fertility, aging, and urbanization. See "China's Next 10 Years," Morningstar magazine,
June/July 2017, pp. 60-63.

Morningstar December/January 2018

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