Excellent Goldman Sachs analysis debunks China bears

Goldman Sachs debunks the bearish notion that China's transition depends on significantly reducing the investment to GDP ratio (i.e. boosting consumption to GDP). At barely $8,000 per capita, China's income level is far too low for this to happen.

Instead, China must move up the global value chain by refocusing its exports away from commodity industrial products and mass assembly of cheap consumer goods, and towards higher-end, larger and more complex end-products; as well as making inroads into sophisticated parts and components production. In the coming decade, the country should become a leading exporter of everything from cars to planes to robots and semiconductors. Its vast domestic market should make this shift relatively easy to pull off with large new investments by rich countries.

As noted before on this blog, China's long, hard slog is to raise total factor productivity (TFP) by getting more value-added output from less labor and capital input. Already there are encouraging signs that this is starting to happen.

Goldman also puts to well-deserved rest the fallacy - still peddled by the likes of Jim Chanos and Gordon Chang - that the "Li Keqiang index" (concocted way back in 2007) of rail freight, electricity consumption, and bank loans is a more reliable gauge of economic activity than supposedly fabricated GDP statistics:

"Railway passenger traffic has been outpacing railway freight volume, electricity consumed by tertiary industries and households have been rising faster than electricity consumed by primary and secondary industries, and equity and bond markets have become increasingly important in providing credit flows relative to bank lending."

In fact, throughout the past year of tumult and uncertainty for the Chinese economy, these nuances have been noted by bullish analysis and commentary (including on this blog); as Chinese growth stabilizes and the much-anticipated hard landing fails to materialize, this knowledge will finally seep more into the mainstream and eventually drown the cacophony of doomsayers who have thrived on selective interpretation and mass mental laziness.

China, no less than the US, is undergoing huge structural economic shifts of the sort that play out over years, even decades: it's not merely that Western rules don't apply to China - they don't really apply to the West anymore, either.