So according to Barry Eichengreen's new working paper, China will experience an economic slowdown, which he terms as a decline in economic growth rate of greater than two percentage points, by 2015. After studying previous economic slowdowns in other countries using a ingenious hazard model with real GDP instead of time as the dependent variable, the authors found that slowdowns generally occur when a country reaches a GDP per capita of approximately $16,000. They find the primary cause of this slowdown is the decline in total factor productivity growth after a significantly large portion of the population has already left agriculture and entered manufacturing. Any changes in investment rates were found to have a negligible effect, though over-investment certainly has a large effect on inflation which itself is a determinant of when a country's economic growth is predicted to slow down in the authors' model.
Two notable exceptions of countries that defied the model are Hong Kong and Taiwan, which are very open economies and thus experienced longer export-led growth. Granted, China has this advantage of being a very open economy, but its aging population, its overvalued currency (by 46% on a trade weighted basis, as estimated by the authors), its current exceptionally high growth rate, low consumption rate (48% or GDP whereas 64% minimizes the chance of a slowdown), and its high inflation rate all contribute to the relative certainty that leads the author to conclude that China will slow down significantly, averaging a growth rate in the 6-7% range over the next decade and 5-6% in the following one.
The authors note the apparent social and financial instability as other factors that may hasten a slowdown in China, but these factors (especially the high level of non-performing loans) have long been dragged into the light by doomsayers convinced that they will lead to China's downfall. However, the government's ironclad grip on the financial system has kept the system functioning well and will continue to do so. The countries large supply of foreign reserves will further guarantee that the financial system is in good health for years to come. Indeed, it is nothing short of miraculous that China has been able to maintain its exceptional GDP growth, large trade imbalance, and significantly overvalued currency with inflation only in the neighborhood of 5%. If inflation was allowed to fully adjust for the undervalued currency, we might expect to see a number two or three times what it is now. Ultimately, this level of government control should postpone a decline in GDP growth rates in China despite what econometric analysis might say as the current CCP does not compare well to any previous authoritarian governments.
The econometric work itself appears to be quite robust as it analyzes slowdowns in many countries over a sufficiently long time period and employs several methods of analysis including Probit and hazard models.
http://www.nber.org/tmp/22264-w16919.pdf
The NBER working paper can be found using the above link, it is titled "WHEN FAST GROWING ECONOMIES SLOW DOWN: INTERNATIONAL EVIDENCE AND IMPLICATIONS FOR CHINA," authored by the venerable Barry Eichengreen as well as Donghyun Park and Kwanho Shin.
