FXIS Market Insights

A remarkable story of growth and expansion lead China to the current number 2 spot in the world.  Please consider: China overtakes Japan as No.2 economy

China's economy expanded 11.1 percent in the first half of 2010, from a year earlier, and is likely to log growth of more than 9 percent for the whole year, according to Yi. China has averaged more than 9.5 percent growth annually since it embarked on market reforms in 1978. But that pace was bound to slow over time as a matter of arithmetic, Yi said.

If China could chalk up growth this decade of 7-8 percent annually, that would still be a strong performance. The issue was whether the pace could be sustained, Yi said, not least because of the environmental constraints China faces.

Is that kind of growth really sustainable?  It is sometimes remarkable to see the inability of even highly educated people when it comes to understanding exponential growth. So then let's take a brief  look at the arithmetic. 

Using the good old Rule of 72  we can approximate the time it takes for any given quantity to double in size or in value.  At a rate of 10%, China's economy would double from the current estimate of $5 trillion to $10 trillion in about 7 years.  In 14 years it would be at approximately $20 trillion; in 21 years at $ 40 trillion and in 28 years, which is roughly one human generation, it would have doubled again to $80 trillion.  The arithmetic is sound but is a 10% growth rate sustainable?   See the chart below for an exact calculation of growth at a compounded annual rate of 10%.

At 7% annual growth, China's economy would still double approximately every 10 years.  Is that still growth rate still sustainable?  In an attempt towards formulating an answer, I would like to refer to the following articles: A Wake-up Call From Greece  and  Privates Eye.

In closing, let me refer to someone who did understand the exponential function very well indeed:

"The greatest shortcoming of the human race is our inability to understand the exponential function." - Prof. Al Bartlett  http://www.albartlett.org/