If you were like me, you saw a large metropolis filled with high rise apartment buildings, inked with chronic air pollution, humming along to the sounds of millions of residents getting through their days.
I believe this is also the image many economic commentators have in their minds when they talk about an upcoming "Chinese" slowdown. But what I want to do in this short little post is to demonstrate why thinking this way neglects one of China's most important quality: its size.
China has a total of 1.34 billion people spread over 23 provinces, 4 municipalities, and 5 autonomous regions. Individual provinces in China can have as many people as entire countries. The coastal province of Guangdong has a population of 105 million -- just shy of Mexico's 112 million and far exceeding every country in the European Union. Sichuan, an inland province (known for its spicy food), has a total of 80 million inhabitants -- larger than the entire Western Untied States combined. In this sense, it's better to think of China as a collection of smaller countries united under a currency union called China, and not as a uniform economic entity.
For example, consider the following map from Wikipedia showing per capita income by province.
As can be seen, there are vast disparities in income. Whereas the coastal provinces are quite rich, the inland ones are quite poor. However, the chart understates these differences because it uses a log color scale. Below is a histogram of the 2012 per capita income and population statistics pulled from the China Data Center associated with the University of Michigan.
GDP per capita in Shanghai was 85,000元 whereas GDP per capita in neighboring Anhui was only 28,792元. Translated into market exchange rates this means an average GDP per capita of $13,848 in Shanghai and only $4690 in Anhui. If we take the Solow model seriously, what this suggests is that there is a massive potential for convergence within China. Even if the inland provinces do not face as favorable conditions as the coastal provinces did when they got rich, do you really expect the 80 million residents of inland Sichuan to stay at 60% of coastal Guangdong's income forever? Especially since China does do so much manufacturing, Dani Rodrik's work on unconditional manufacturing convergence suggests that these poorer provinces will inevitably partially catch up with the richer provinces. There's just not enough income for them to get caught in a middle income trap.
There is also no systematic relationship between population and income. No matter the combination of big or small, rich or poor, there is a Chinese province that fits the description.
Recognizing this heterogeneity also provides a good reason for why looking at China's GDP per capita statistics provide an overly rosy picture of China's wealth and an overly dour prospects of China's future growth. Because there are a few provinces that are now somewhat rich while most provinces are still very poor, mean GDP per capita for the nation does not accurately represent the plight of most provinces. You can see this by the fact that most provinces in the above scatter plot are below the regression line that approximates the mean level of GDP per capita. As a result, we underestimate the role convergence has to play in bringing more Chinese economies out of poverty and therefore underestimate the true growth potential that China has.
Bottom line is that "turning point" arguments that fail to consider the subtleties of individual provinces will lead us astray. Too often, we associate China with middle income images of massive apartment complexes, where in reality much of China is still very poor. Any serious evaluation of where China is going requires careful consideration of how we think growth in individual provinces will evolve. And based on the provincial data, I am quite optimistic.