China Worries Unwarranted

Prior to today, the S&P 500 index was down four days in a row, and many market observers are blaming China, specifically the recent news about Evergrande, a major Chinese real estate company that looks to be heading to default on its loans. While many will credit last night's Chinese liquidity additions as saving the day, we were never that worried about Evergrande. We want to address this, but before we do, let's take a step back for a second and talk about why China is where it is today.

Chinese GDP has grown around 9% a year for the last 25 years. Impressive to say the least and something no other country in the world that we know of has been able to achieve. But how do you grow a country by 9% a year for 25 years? Measures of output like GDP really come down to two major factors: growth in the labor force (hours worked) and growth in productivity (output per hour). On both fronts the Chinese have been blessed in recent decades.

The best prescription for unprecedented productivity gains is simple.

1. Do nothing for thousands of years.
2. Then borrow everyone else's technology.