China - what next?

The BRIC economies were grouped in 2001. The concept was great marketing. Economically, the analysis was less great. In 2001, BRIC countries averaged 2% of the world economy each. Today, Brazil, Russia and India average 2.3% of the world economy each. China is 15% of the world economy.

It was never BRIC. It was C.

After this success, what is next for China and the world? China's model over the past twenty years cannot continue. The globalization that brought real trade to a record 23% of real GDP was about outsourcing to longer supply chains, benefiting China. Technology and localization undermine that model today. China's "Made in China 2025" plan should reflect this.

China's recent growth has been debt fueled. The debt level is not alarming. Debt is domestic financed, serving as an inter-generational wealth transfer. The growth in debt is unsustainable. As China seeks to stabilize debt to GDP ratios, it will have to accept slower economic growth.

Demographics and productivity argue that China's trend growth rate will decline. The trend growth rate is likely to be closer to 5% than to 7% over the next decade. This increases the importance of raising the consumers' share of the economy. A rising consumer share means living standards grow faster than GDP. That should create a stable social outcome.