On Speculating on China’s Growth Rate; Whole Grains and Longevity!

From: aditya rana
Date: Sat, Jun 18, 2016 at 1:04 PM
Subject: On Speculating on China’s Growth Rate; Whole Grains and Longevity!


The slowing economic growth rate in China continues to elicit widely different future estimates from both the bears and the bulls (though the voices of the bears tend to be more prominent and widespread thesedays!). One of the critical questions facing China (and the world) is whether a 6-7% growth rate expectation for the rest of this decade is realistic. What does traditional economic theory have to say about this? Antonio Fatas, economic professor at INSEAD, wrote an interesting note on the subject. To summarise:

-The slowing of GDP growth in China has been seen both as a natural transition to more sustainable growth rates and as a breakdown of the Chinese growth model. To help determine whether the 6-7% rate assumption is realistic it is useful to compare the decelerating growth rate with what other countries have experienced historically.

-The nobel laureate Robert Solow developed the convergence model which predicted that emerging and low-income countries, having more opportunities for investment, are therefore likely to grow faster than countries at the technology frontier. This implies that GDP per capita in the low-income countries would converge to that of the developed countries, and that the growth rates of the former group would naturally slowdown to reach those of the countries at the frontier. (The theory also states that some countries will not converge to the same levels of GDP per capita).

-An example which validates the theory well is South Korea. Plotting the level of GDP per capita of Korea relative to the US at the start of three previous decades and comparing them to the growth rates of South Korean GDP per capita in the ensuing years (see chart below).

-The graph shows that South Korea started in 1980 with a GDP per capita below 20% of the US, which led to an annual growth rate during the 1980-90 period of about 7%, resulting in a level of 30% of US GDP per capita by 1990. With decelerating growth the growth level achieved during the next decade is 5.5%, falling further to 4% from 2000. Today South Korea has a GDP per capita at 65% of the US, and over the coming years South Korean growth is likely to decelerate further as it converges to the US.

-Looking now at China we see that in 1980, China had a much lower relative GDP per capita and therefore a very fast growth rate of 7% relative to the US (see chart below). During the 90s the growth rate averages 8% , possibly because China was moving to a more natural growth rate given its lower relative GDP per capita levels. However, during the 2000-20014 period the growth rate averaged 9% which looks spectacular compared to South Korea – by 2015 China had reached 25% of GDP per capita (the vertical red line), by which time South Korea was already growing less than 6%. This highlights the true miracle of the Chinese 8-9% growth rate.

-If China were to follow South Korea’s example, it is likely to experience a growth rate slightly below 6% which is not far from the government’s estimate, given that we are talking about a path of decelerating growth rates. (The growth rates are in per capita terms, and given that the working age population is not growing, the GDP growth rates should be similar).

-Is using South Korea as a benchmark too optimistic? Looking at other fast growing economies during the same period (see chart below) we see that South Korea is clearly the best performer amongst countries below 50% of the US GDP per capita (with plenty of failures!). Some countries are outliers from above as well – Hong Kong, Singapore, Ireland, Norway. However, it is not clear that the outliers on either side are relevant to China’s case.

-To conclude, the slowing growth in China is a natural evolution of its economy as it follows a convergence path and growth rates around 6% still put China in the best amongst its class category. The risk for China is to maintain policies and institutions which are also is the highest category for its stage of development.

Interesting piece which lays out a persuasive case for the continuation of China’s 6-7% average growth rate over the coming decade . The bears will argue that China’s past growth rates were an aberration – but China has been able to achieve above par growth rates (for its stage of development) for three decades due to supportive policies and there is no reason to believe that this will dramatically change going forward.

-Jim Walker. the well respected and top rated Asian economist for 11 years running (as the former chief economist of CLSA), has been a long-time China bear made the following points in a recent interview:

-While he is by no means a China bull, the China hard landing bears are way too pessimistic. China growth is likely to slide to between 3% to 5% over the next two to three years, but it will not be an issue as China does not need to create as many jobs as before.

-The key factors supporting China are its exceptionally high savings rate – when the US had its subprime crisis its overall savings rate was 17% with household savings at 3%. China’s household savings rate is in the mid to late 30s and its overall savings rate is 49%.This will provide it with ample resources to manage a path to lower longer term growth rates.

-Secondly, when the US had its subprime crisis its banking reserves were essentially zero – while China has banking reserve requirements of 17%. In addition to the central bank’s balance sheet of about $3.2 trillion, it has banking reserves of 21 trillion renminbi ($3.2 trillion) providing it plenty of ammunition to deal with a fallout of the post financial crisis pending binge .

-People made a big deal about the pace of the decline in foreign exchange reserves – while there was some capital flight the key thing to note is that despite it, money supply (M2) kept going up!

Whole Grains and Longevity:

One of the more recent dietary fads (the “low carb diet”)is to de-emphasize grains – being a major source of “unhealthy” carbohydrates. As is usually the case, this view does not stand up to scientific scrutiny as two recent studies demonstrate:

-1) In a meta analysis, Harvard scientists analyzed the whole grain intake and rates of death for 786,076 adults across 14 studies. Compared to people who ate the least whole grains, people who ate the most whole grains had a 16% lower risk of death from all causes, an 18% lower risk of death from heart disease, and a 12% lower risk of death from cancer.

-However, the significantly lower risk of cancer death was only seen in people who ate at least 30g whole grains per day (the amount in about ½ cup cooked brown rice, or 2 slices of 100% whole grain bread). The researchers also observed a dose response relationship, meaning the more whole grains someone ate, the less likely they were to die during the study period. According to the scientists, these results “strongly supported the current Dietary Guidelines for Americans,” which encourage at least 3 servings of whole grains per day (totaling at least 48g whole grains).
Circulation. 2016 Jun 14;133(24):2370-80. (Zong G et al.)

-2) Researchers in Europe and the US analyzed 45 studies (ranging from 245,012 to 705,253 participants each) in a meta analysis to understand the relationship between whole grains and health. Compared to people who ate the least whole grains, people who ate the most whole grains had a 16-21% lower risk of heart disease, an 11% lower risk of cancer, and an 18% lower risk of death from all causes, as well as a 19% lower risk of death from respiratory disease, a 36% lower risk of death from diabetes, a 20% lower risk of death from infectious disease, and a 21% lower risk of death from all non-cardiovascular, non-cancer causes.

-The researchers also found that a 90g increase in whole grain foods per day (about 3 servings) was linked with a 19-22% lower risk of heart disease, a 15% lower risk of cancer, and a 17% lower risk of death from all causes, and that “even moderate increases in whole grain intake could reduce the risk of premature mortality.” Whole grain bread, whole grain cereals, total grains, total cereals, total bread, pasta, and bran, were also singled out for their relationship with lower rates of various diseases and/or early death. The researchers conclude that their findings “strongly support existing dietary recommendations to increase whole grain consumption in the general population.”
British Medical Journal. 2016 June 14;353. (Aune D et al.)

So here’s to making sure you get those three servings of whole grains daily!


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