I'm shorting Morgan Stanley after reading the NYT column on China by Ruchir Sharma, the head of emerging market equities at Morgan Stanley Investment Management. The piece begins by telling readers:
"more than half of Americans think China is already the world’s leading economy — an astonishing misperception, given that China’s gross domestic product is still less than half of America’s."
That is not what our friends at the IMF say. On a purchasing power parity basis, which assigns the same set of prices to goods and services produced in both countries, China is already almost 80 percent of the size of the U.S. economy. There is also some serious research suggesting that because of mis-measurement of prices in rural areas, China's economy is already larger than the U.S. economy.
The piece then goes on to tell us:
"It is well known that developing nations hit a “middle-income trap,” and stop catching up to rich nations, when per-capita income reaches about $5,000 to $15,000 (in current dollars). The examples (Brazil, Mexico, Malaysia) are numerous."
Huh? This is well-known to whom? This is a huge range (imagine per capita GDP in the U.S. tripled to $150,000 per person) that includes almost 70 countries. It makes a huge difference whether a country's growth slows near the bottom of this range, where they are still relatively poor, as opposed to the top, where they are decidedly middle class.
Furthermore, countries enter this range with radically different growth paths. The speedy growers like China are the exception. More typically countries edge up into this range with modest growth rates. In the more typical case, there is not much room for a slowdown. Of course in some of the fast growers, like Malaysia, one of Sharma's examples of a slowdown country, there is little evidence of a slowdown as they maintain rapid growth right through this range.
Then Sharma tells us that China passed his $5,000 mark last year. Actually the IMF says it was 2007, and if the understatement view is right, China hit this mark as early as 2005.
Next we get my favorite:
"In recent years China has accounted for nearly half of global growth in oil demand, and every 1 percent of G.D.P. growth in China added 10 to 30 percent to the price of oil."
I'm still trying to figure this one out. China consumes a bit more than half as much oil as the U.S., but somehow if its GDP increases by 1 percent, the price of oil rises by 10-30 percent. How exactly does that work? If U.S. GDP rises by 1 percent, does the price of oil rise 20-60 percent.
Finally, we are told that:
"China’s slowdown is also opening the door to a revival in American manufacturing. China is suffering many symptoms typical of a maturing miracle economy, from a strengthening currency to rising wages, land prices and transport costs, while the United States has a weak currency, stagnant wages and a moribund property market. The dollar is near record lows (in inflation-adjusted terms) against many of its trading partners, including China."
I understand the point about relative prices, but don't we have a better export market if China is growing rapidly? What did I learn in my econ 101 class that was wrong, don't fast-growing countries have more rapid import growth than slow-growing countries?
Perhaps there is something that made sense in this piece, but it's not easy to find. It's hard to understand how a piece so chock full of errors finds its way into the NYT oped page.