Sunday, November 21, 2010

The China question: worst case scenario?

Unless I am mistaken I have been to China 4 times in the last year or so (Hangzhou, Beijing, Shenzhen and Shanghai). Each time I am here I ask the following question (sample size may now be well over 20 or 30):

At 95 percent confidence, what is the worst case scenario for China in the next 10 years? (i.e., what is the worst case scenario that has at least 5 percent probability?)

To ask the question precisely I have to use English, in which case the people I'm talking to are scientists, engineers, professors, business people or students; now that I think about it, I even put the question to some government officials at the ministry of commerce over lunch. I have also asked a less precise version of the question in Mandarin to ordinary people like drivers or hotel staff.

I usually specifically prompt the person I'm asking whether social unrest or environmental catastrophe are possible, but almost no one thinks so. Some sophisticated academic types might acknowledge them as possible outcomes, but all considered them unlikely. The typical worst case scenario involves economic problems, perhaps an rmb-dollar crisis. No one mentioned the possibility of military conflict with the US, or the Taiwan problem.

My priors allowed for the "fragile China" scenario: a giant Potemkin bubble with massive mis-allocation of capital, inhuman working conditions and income inequality leading to social unrest, low-cost labor with little innovation, etc. But from what I've seen and heard that scenario is increasingly implausible.


James Miller said...

Within the next ten years there is at least a 5% chance of a prolonged worldwide depression in which developed countries massively cut back on trade with China and the U.S. defaults on its debt explicitly or through inflation. In this case China might have to send a hundred million city dwellers back to the farms.

anon said...

On a realistic accounting of economic size China has already passed the US. See SH's previous post.

steve hsu said...

The question in that scenario is what the PRC govt would do to keep a lid on social unrest. I think this scenario is relatively close to the one mentioned by (sophisticated) people that I've surveyed -- primarily an economic problem brought on by an external shock.

Tal said...

"a giant Potemkin bubble".

No that's Dubai. Everything which can be shipped is made in China.

Why should the PRC development differently from the ROC, ROK, Japan, Hong Kong, or Singapore?

KenC said...

Steve. I was born and raised in Hawaii. When I was in my teens (mid 1960’s) the richest man in Hawaii was Chin Ho. He had built a string of hotels in Waikiki-- and elsewhere-- and was the first billionaire I had ever heard of. He was, by the way, referenced in the first Hawaii 50 television program in a tongue in cheek fashion. It was an inside joke.

I remember wondering later (early 1970’s) thinking ”How in the hell can China be communist when they are genetically and culturally the worlds best capitalists?” I have an old--perhaps better stated --long time friend from Hawaii named Weylun Fung. He was always fond of telling me “it takes two Jews to make one Chinese.”

Make of that what you will.

Yan Shen said...

By realistic accounting, are you referring to PPP rather than nominal data? Here's a link suggesting that China could surpass the US in total PPP adjusted GDP by as early as 2012.

"Taking into account the difference in prices of the same goods between countries — in other words, measuring the real purchasing power people have in each country — the think tank predicts China could have a larger economy than the U.S. by 2012."

By the way, I think it's remarkable how China has surpassed even the goals it's set for itself in terms of economic development. Back in 2000, when the nominal per capita GDP in China was around $800, the goal set by the Chinese Academy of Social Sciences was to bring up the nominal per capita GDP to around $3000 by the year 2020. According to the most recent IMF estimates for 2010, the nominal per capita GDP in China is already slightly over $4200.

"According to Li Peilin, director of the Sociology Institute of the Chinese Academy of Social Sciences, which compiled the book, GDP per capita has been growing rapidly in recent years.

"From 1978 to 2000, GDP per capita in China increased from $400 to $800, which took 20 years. When we set the goal in 2000 to build up a well-off society by 2020, the forecast was to double the GDP per capita within 20 years, jumping to more than $3,000 in 2020," he said.

The report, Society of China: Analysis and Forecast 2010, said rapid economic growth, decline in the new population and appreciation of the renminbi contributed to the acceleration of the growth rate."

Pincher Martin said...

"Why should the PRC development differently from the ROC, ROK, Japan, Hong Kong, or Singapore?"


Taiwan, Korea, Hong Kong, and Singapore were all small- to mid-sized global players who could piggyback on the global economy with mercantilist policies without provoking or arousing extreme retaliatory measures to prevent or forestall their rise.

Japan was an exception. But Japan's economic rise was not matched by a comparable rise in its military and diplomatic ambitions. It was satisfied to subsume those ambitions within its Cold War alliance with the United States, allowing America to take the lead. Even so, Japan's economic rise excited great passions in both the U.S. and Europe that are largely forgotten today.

Pincher Martin said...


I think your informal survey proves little more than that the Chinese you bump into are optimistic about their future. That shouldn't be much of a surprise. I've seen many other polls taken in China over the last few years which show the same thing.

But people are often poor predictors of their future. They rarely see bad events forming on the horizon. For if they did, they would certainly try to avoid them.

This tendency is true even of the elite. How well did Ben Bernanke or Alan Greenspan see the housing bubble? Or the U.S. financial meltdown? The economist Dean Baker, who predicted the collapse of the U.S. housing market, often complains at his blog that almost no other economists made note of the housing bubble during the early years of the Bush administration. Or its potential deleterious effects on the U.S. financial system.

A black swan is hard to anticipate if you have never seen such a creature. Many Chinese living today know only one kind of trajectory: up. They have experienced three decades of better living standards with only one short hiccup. The Chinese economy suffered a brief recession after Tiananmen two decades ago, but quickly roared back. With that kind of history, why wouldn't most Chinese feel confident about their future? But as they say, past performance is no guarantee of future results.

steve hsu said...

It's always possible that consensus opinion will turn out to be wrong. But many of these are thoughtful and knowledgeable people.

Pincher Martin said...


1) I read your blog regularly, but not religiously. If you have read Tetlock (and other social scientists who have studied expert forecasting), then I'm even more mystified by your original post and the subsequent reasoning you have used in the comments section to support it. Do you believe you can make accurate forecasts based on your record with the tech and housing bubbles, and by having known the people involved at LTCM better than I know them? And that you believe this record makes your pronouncements on China's future more reliable? If so, then you may have read Tetlock, but you certainly didn't internalize his argument.

2) Okay. Here's another data point: ( ) A 2005 Pew study shows the Chinese very optimistic about their future:

"Despite their limited political freedoms, the Chinese people, surveyed in six major cities and surrounding rural areas, are optimistic about the future and confident that the growing opportunities they have experienced in recent years will continue to expand.... China’s outlook toward the future is even rosier. Nearly seven-in-ten (69%) Chinese expect that five years from now they will stand on the top rungs of the ladder of life, an increase of 14 points since 2002. In this respect the Chinese rival Americans whose predominantly sanguine outlook is among their most distinguishing traits."

Unfortunately, that famed American sanguinity Pew noted in 2005 didn't really tell us anything about the immediate American future, did it? Yet you now believe that this new-found Chinese sanguinity tells us something about China's future?

3) Not necessarily. Your sampling method appears to be randomly speaking to Chinese in the major cities you happen to bump into, so I'm guessing your approach is far too urban-centric and seat-of-the-pants for you to say with any certainty that you are getting a good cross-section of the Chinese population.

It's ironic you mention Gordon Chang. I interviewed him a decade ago for a Taiwan radio station just after his book on China's impending collapse came out. I found him a pompous ass and his book sensationalist crap. But in some ways, your opinion here on China is little more than the flip side of Chang's 2001 opinion on China. In Chang's book, anecdotes were dressed up as meaningful indicators of the future and a brief tenure in China made him an expert on the country.

Pincher Martin said...

"But how else are you going to get a picture of what is happening in a country?"

I think it's very hard. My own country's twists and turns continue to surprise not only me, but many self-proclaimed experts. What hope do we have then for understanding China's future?

But let's be clear. There is a big difference between getting "a picture of what is happening in a country" and assuming that snapshot gives you a better understanding of how the country's future will play out. I took no issue here with former, only the latter.

steve hsu said...

Let me repeat -- since I didn't give my PDF for the future of China you have no basis for most of your comments and are over-interpreting what I have written. I am not the straw man that you are seeking.

You seem to think you can deduce my PDF and confidence level in that PDF from what I've written. The point of citing Tetlock and my previous track record is so that you'll know that I have a much more sophisticated epistemology than you give me credit for. If I bumped the probability of the nightmare scenario from 20% to 10% (this is just an example; I should really give an uncertainty on the prob. itself, and that would be high!) as a result of having spent an integrated month or two in China, that would correspond to "increasingly implausible" (as I wrote) but would not, in my mind, constitute an overly naive Bayesian update. You seem to assume that I've updated directly to the average among people I spoke to. (i.e., that I'm too naive to correct for bias on their part, or selection bias in people I spoke with, etc.) Where did I say that?

If you look at my portfolio (real bets, not mouth bets) you won't find any trades that assume an optimistic China scenario at high confidence level. There are such bets that can be made.

Finally, let me note (again) that I spoke to people who were fresh from the countryside and others who spend time there regularly. I was in Shenzhen recently, which is a primary destination for such people.

Yan Shen said...

I think you're taking yourself a bit too seriously here. I never got the impression that Steve meant for his post to be a highly scientific work on the possible future of Chinese development. He relayed the opinions and attitudes of actual Chinese, who clearly are in a better position to comprehend the potential pitfalls awaiting Chinese development, more so than Western armchair theorists.

By the way, what new and insightful perspective do you have to offer on Chinese development? None, except to reiterate the obvious point that predicting the future is enormously difficult and that anything could happen, all the while acting as though you stumbled onto something utterly profound. Plus throw in the obligatory griping about China artificially devaluing its currency and making its exports more competitive. But since you seem to consider yourself an expert of sorts in this matter, why not lay out your own thesis for us on the future path of Chinese development?

What wildly objectionable prediction did Steve make that makes him the polar opposite of Gordon Chang? He rather cautiously observed that the worst case scenarios were increasingly implausible. Do you disagree?
If anything, Chinese development has exceeded many of the predictions made in earlier years. I linked to an article highlighting how the Chinese Academy of Social Sciences set fairly modest goals back in 2000. But this isn't just limited to the Chinese Academy of Social Sciences. Predictions made by various organizations are constantly being amended forward in time as China time and time again exceeds expectations. Given how fairly pragmatic and competent the government has been with regard to economic development ever since Deng opened up the country over 30 years ago, it's understandable that the Chinese government has accumulated some benefit of the doubt with regard to its ability to confront new developmental obstacles.

You seem to miss the obvious point, that despite prediction being an enormously tricky affair, the best way to understand what future obstacles China confronts is to speak with the actual people in that country directly.

LondonYoung said...

Over dinner Larry Summers once claimed to me "among professional economists, the correlation of their predictions of gdp growth for various countries over the coming ten years with the trailing ten year gdp growth is approximately one ... historically the correlation of gdp growth for various countries over sequential ten year periods is approximately zero". I didn't ever check out his claim, but this has been one block-buster decade for China - in the rearview mirror. **N.B. I am bullish China **

Pincher Martin said...

"I think most of the Western commentators are deluded in thinking that China is that dependent on the rest of the world. It is not. Neither is India, for that matter. Most of their trade in those countries is internal (90-95%). Believing numbers coming from ANY source is suspect..."

You first give us numbers to buttress your argument about China's autarkic state, and then turn around to tell everyone not to trust anyone's numbers?

Well, okay. I'm forewarned.

But for argument's sake, let's trust your numbers for a brief moment. Let's assume that the vast majority of China's economic activity takes place entirely within China's borders. How does that fact by itself make China independent from outside economic forces?

Before you answer, follow this line of logic: Non-performing subprime loans are a minority of total subprime mortgages; the subprime mortgage market is a small percentage of the overall mortgage market in the U.S.; the overall mortgage market in the U.S. is a small percentage of the U.S. financial markets; the activity in the financial markets is a small percentage of the overall activity in the U.S. economy; therefore, the failures in subprime loans are too small to threaten the U.S. economy.

I'm not making this line of logic up. It's a condensed variation of the many arguments many economists (including, at one time, Ben Bernanke) were making just a few years ago.

Yet now you want to use a similar argument with China by claiming exports are too small (relative to GDP) to make a claim on China's economic future. How does that work?

Yan Shen said...

You seem to miss the point entirely. No one is claiming that the average Chinese person has a profound grasp on everything that's going on in the country. However, if you want to assess as accurately as possible what the current climate in the nation is, it would be wise to begin by speaking with the people who actually live there. The more people you talk to the better, and also the more diverse the sample the better as well. You seem to confuse the best possible method with a method that's necessarily effective in absolute terms.

What's interesting is that I've heard the exact opposite regarding the Communist Party, that it's increasingly becoming more internally democratic. Perhaps you can cite a source that argues significantly to the contrary. By your logic, since democracies are even more conflicted in nature at the ruling level relative to authoritarian regimes, we should be even more pessimistic regarding the ability of liberal democracies to resolve developmental obstacles. You offer up nothing interesting or concrete, only vague and generic references to potential issues we've already heard before, i.e. growing income inequality could lead to social unrest, etc.

"But if you believe this is some fixed variable that guides China's future, then you mistake a recent trend for something permanent."

What was that saying, that those who ignore history are doomed to repeat it? I think you're utterly mistaken if you believe that you can't draw any meaningful historical inferences whatsoever. Sure, past history probably isn't too useful for predicting what the price of a stock will be 10 years from now. But for predicting aggregate macro phenomenon, where it takes a lot of things going wrong in order for Chinese economic development to be totally derailed, you can predict the future with a better degree of certainty. The fact that Chinese leaders have been so pragmatic and competent over the past 30 years suggests to me something about the Chinese leadership and perhaps the Chinese people as a whole, that on average they're relatively adept(high IQ?) and possess a certain suite of behavioral dispositions amenable to developing a modern scientific and technological society. Don't underestimate the importance of human capital when it comes to technological and economic development.

"I have no idea. It could go either way. "
Yup, as I figured. That's the full extent of your insight. To throw your hands up into the air and say that anything's possible and then to demonize anyone who wants to make a prediction whatsoever.

"The typical person is ill-informed about many aspects of his own country, from its politics to its military to its diplomatic relations to even its economy."

Sure, though I've read articles here and there suggesting that on average Chinese are more attuned to these issues than their American counterparts. Don't underestimate the difference between two populations differing in average IQ by perhaps as much as 1/2 of a SD. Of course, Steve made it clear that he talked to people whom he felt were in the know on such matters.

The main issue though is how incredibly anal you are about a blog post. You act as if someone wrote a PhD thesis on Chinese economic development

steve hsu said...

How could I not be aware of those potential biases? Would you like to belabor the obvious some more?

If X found a job in the city it doesn't mean that X is unaware of the situation back home, what their classmates or family are going through. That's valuable data and you get a sense of it from talking to people. I've been a CEO, I've been around a lot of Chinese people of all types, and I don't lack psychological insight. And by the way I spoke to people from provinces all over the country. In Shenzhen everyone is from somewhere else.

The 95 percent confidence level part of the question is asked only to sophisticated people who have a feel for what likely or unlikely scenarios are. If you say "tell me about an unlikely worst case scenario" what you've asked about is ill-defined. They can tell you about asteroids hitting the earth, or something that is only slightly improbable in their minds. It isn't false precision if you are talking to sophisticated people, anymore than asking a trader what he'd bet on at 10 or 20 to 1 odds. The answers may not reflect reality (people are fallible), but they reflect state of mind.

Pincher Martin said...


"It is difficult to envision a scenario where exports are shut off to China drastically without also seeing the Western economies declined dramatically."

Perhaps. But some turns in history are not made on a strict cost/benefit analysis. Sometimes people worry more about somebody else's relative gains more than their own absolute losses.

But I do find it odd you would just suggest that China's exports are not terribly important to China's economic growth, yet turn around and say that Chinese imports are critical to the West's economic growth.

"In the short term, the West is muddling through, there is no stomach for a protracted trade war given the fragile state of the Western economies."

I take the opposite view. When the West was doing well economically, there seemed to be less appetite for taking on China. But when times get tough and stay tough, the need for a change in the status quo may grow. Witness Bernanke rapping China for its current account surplus; that was unthinkable a few years ago.

Will tensions continue to rise? Who knows? But I certainly don't think that economic bad times in the West preclude such a possibility.

Yan Shen said...

Do you understand English? I stated that people in China are in the best position to grasp the potential pitfalls of Chinese development in a RELATIVE sense. That is, they're better equipped than anyone else to do so. What part of the distinction between relative and absolute don't you understand?

Also, you seemed to have missed my point regarding IQ. I never asserted that people with higher IQs were better at predicting phenomenon in any statistically significant sense. I asserted that people with higher IQs were better at sustaining scientific and technological development. Do you disagree? You seem to be under the impression that we can infer nothing about the intrinsic traits of the Chinese population or the leadership from the past 30 years of economic growth. I disagree. I say that we can reasonably infer that they're highly competent IQ wise and that they possess a suite of behavioral traits highly amenable to technological and economic progress. The same probably isn't true of every other group of people on the planet, which is why there's probably no universal set of principles applicable to judging the potential path of development in all parts of the world.

You also asserted that the average person lacked knowledge about the CURRENT state of affairs in his or her country. Your own words... "The typical person is ill-informed about many aspects of his own country, from its politics to its military to its diplomatic relations to even its economy." Clearly a higher IQ population is likely to have a more informed citizenry. That was the only point I made.
This has nothing to do with me claiming that therefore higher IQ people are better at predicting future events. In other words, you're attacking a straw-man argument that no one has made and flailing your arms hopeless about trying to land a hit somewhere. On the one hand, you want to argue that even informed understanding of an adequate cross-section of the Chinese population isn't particularly useful for determining its potential future progress. On the other hand, you inveigh against Steve precisely because you feel that his sampling methodology isn't rigorous enough. Those seem to me to be somewhat inconsistent beliefs.

Yan Shen said...

'And I demonized no one. That's your own gloss. Steve clearly knows about this research and yet for some reason hasn't internalized it. Perhaps because he still doesn't quite believe it. Or perhaps he hasn't made his mind up about it yet."

Or perhaps because it's a fucking blog post and not a PhD thesis. Maybe Steve didn't anticipate that one of his readers would be so incredibly anal about it. Who knows? What I do know is that you're a gigantic bore. All you do is blather on about facts which are already obvious to most of us here, that predicting the future is tricky, that experts sometimes have no better predictive ability than the average layman, etc, while offering up nothing concrete of your own and acting as though you were a genius because you read the works of Tetlock or someone like Nassim Taleb. When pressed for a personal thesis, you simply offer up an I don't know. I don't think the thought police will hunt you down 10 years from now if it turns out that your predictions today end up being off the mark. Maybe you should lighten up and join in on the predictive fun and offer us your own hypothesis regarding possible developmental scenarios and the associated probabilities. But knowing you though, you'll probably come up with another I don't know. You seem to have no grasp of the distinction amongst various kinds of predictions. If I were to predict that 10 years from now, nominal per capita GDP in China would be higher than it is today, that would almost certainly be true. If I were to predict that nominal per capita GDP would increase by 3x over a 10 year span, that would be far less certain. Steve never made an extremely precise claim that was outlandish in nature. He didn't predict that nominal per capita GDP in China would be twice that of the US within only a 10 year span, for instance. He made a fairly cautious claim, that the worst case scenarios were increasingly improbable.

And with that my friend, I'm through talking to you. You're a gigantic bore and clearly someone who takes himself a bit too seriously. The fact that a relatively dumb person like me can point out so many errors in your reasoning should suggest to you where you stand in the bigger scheme of things.

Capablanca said...

Pincher Martin,

"sanguinity"? I prefer "confidence". "tendentious", "gloss", and "urbanities" are misused.

"Questioning designed to give an air of mathematical precision to something obviously not very precise."

That is sort of true. This jive talk can be "operationalized" with bets, but it would be much better if Steve spoke in such terms rather than jiving.

In the past Steve did make a category mistake when he spoke of evolution as currently understood as being "improbable".

"The 95 percent confidence level part of the question is asked only to sophisticated people who have a feel for numbers. "

This is just BS.

You see Steve is very very very excited about China's success, just like I'm excited when Germany wins at the Worl Cup. He'd like to make a long term leveraged bet on China and is looking for assurance. But he's asking too simple a question.

The answer to that simple question is at 95% confidence in the next 10 years China will continue its current course. As things have been so they will be.

Sabine Hossenfelder said...

Off topic: What do you think about ?

Sabine Hossenfelder said...

Off topic: What do you think about

KenC said...

Yan--here's a small piece of the puzzle to add to the mix:

Pincher Martin said...

Yan Shen,

"Or perhaps because it's a fucking blog post and not a PhD thesis."

Idiot. You keep focusing on trivialities. What does it matter whether the argument is made in a blog post or during a discussion over coffee in Starbucks or in a scientific treatise worthy of Newton? Steve draws a conclusion from evidence which doesn't support it. Period. That's the beginning and end of the discussion. The rest has been you struggling to comprehend what the discussion is about.

"Maybe Steve didn't anticipate that one of his readers would be so incredibly anal about it."

Read the original damn blog post, you moron. A professor writes, "[a]t 95 percent confidence, what is the worst case scenario for China in the next 10 years? (i.e., what is the worst case scenario that has at least 5 percent probability?)", says this line to a couple dozen Chinese, draws conclusions about China's future based on the answers, and then you call me "incredibly anal" for questioning its precision?

The only thing "incredibly anal" in this discussion has been your insistence in shoving your head up your own ass.

steve hsu said...

Thanks for pointing that out. Not sure which assumption lets them get a finite bound for monster-like configs.

steve hsu said...

Was there a specific post you wanted my comment on? Your pregnancy picture is awesome! Best of luck with the kid :-)

steve hsu said...

"The answer to that simple question is at 95% confidence in the next 10 years China will continue its current course. As things have been so they will be."

I can't tell whether you are joking here or that you just slipped one by old Pincher.

Capablanca said...

I am a pretentious illiterate.

Capablanca said...

I think I slipped one past myself. What a charmed life to take pleasure in vulgar people they do not intend you take.

Pincher Martin said...

Perhaps if you ask Capablanca how he thinks he'll feel about his line in a decade, it might help increase your confidence level in whether it's a joke or not.

RKU said...

Well, although I'm not Chinese myself nor a specialist, I've always been quite interested in the country, and thought there was a pretty good chance it would take off economically as far back as the mid-1970s, with my forecasts growing steadily stronger and more optimistic following Deng's opening to the market and then the early strides of the 1980s. The reasons behind my analysis were very simple but hence rather robust: HBD, cultural factors, and the very obvious analogies in the highly successful developmental paths already taken by all the closely related East Asian countries such as Taiwan, Japan, South Korea, Singapore, and Hong Kong. The only time in the last thirty-five years I became very worried was in the aftermath of Tienanmen, which I feared might seriously derail things, but it really turned out to be more of hiccup.

Looking back on it, I'd have to say that China has consistently outperformed even my most optimistic projections across every one of the last 3 1/2 decades, so I'd be a *awfully* surprised if it now suddenly suffered a major calamity, since the problems it faces today, while certainly serious, are so much less formidable than those of 1979 or 1989 or 1999. I still remember when The Economist put the remarkable economic progress of Chinese peasants on their cover in 1985 or so, and I showed it to all my friends as proof I'd been right all along in my predictions.

For what it's worth, since at least the 1970s I'd always been expecting the old Soviet Union to collapse, and many of my friends felt the same way, though all of us were shocked that it happened in such a peaceful manner, and even without some precipitating catastrophe.

On the other hand, I've been totally horrified at the remarkably rapid decline of American society over the last decade or so, and never dreamed the downward trajectory would become so sharp. Frankly, if it came down to betting whether China or America would still exist in more or less a relatively continuous extrapolation of its current form a decade or two hence, I know which one I'd pick. And until a couple of decades ago, I never would have dreamed that America could be staring so directly into the face of a "historical discontinuity."

Well, for the future of human civilization, it's "win some, lose some" I suppose...

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