The Chinese economic miracle is over
All too often the narrative around a series of stylised economic “facts” becomes detached from the facts themselves. Nowhere is this more pervasive than in the narrative on China.
Though it is broadly accepted that China’s growth is not as rapid as it was back during the breakneck economic progress between 1990 and 2020, the narrative remains that, despite a few short-term speed bumps, the country is still on course to catch up with or indeed surpass the US as the world’s preeminent economic power.
The facts, detached from the commonly accepted narrative, tell the opposite story. As Ruchir Sharma, the chair of Rockefeller International, has written: “In a historic turn China’s rise as an economic superpower is reversing.”
The story of its growth and transformation is one of the past half-century, not the next. Debt, deflation and demographics are crippling it.
There can be no doubting the phenomenal transformation that has occurred. After China opened itself to the world in the 1980s under Deng Xiaoping, its share of global GDP rose almost 10 times from an inconsequential 1.8% to 18.4% in 2021.
Since then, however, China has simply not been able to keep up. Since 2022 its share of global GDP has shrunk, materially, to barely 17%. According to Sharma, this is the biggest drop since the 1960s.
This data comes from Beijing itself, in the form of official nominal GDP data, meaning that Chinese authorities must be all too aware of the malaise. The figures are not, however, adjusted for inflation, which calls into question the official stance that real GDP has indeed been expanding consistently at more than 5% a year.
Most economic estimates register real long-term potential growth as no more than 2.5%. Has Beijing been doctoring inflation statistics to make the real growth figures look overly robust?
The reasons behind this structural slowdown are clear. First, the demographic tailwind of an untapped reserve army of labour entering the workforce in the 1980s and 1990s has already turned into a handbrake.
The one-child policy resulted in a demographic timebomb of a rapidly ageing population and a shrinking population of workers that will have to carry the cost of this tidal wave of retirees.
The baby bust has already lowered its share of the world working-age population from a peak of 24% to 19%, and it is expected to fall to 10% over the next 35 years. With a shrinking share of the world’s workers, a smaller share of growth is almost certain.
Second is the drop in productivity. Sharply higher debt, an increasingly interventionist government and bloated state-owned enterprises have all dampened labour productivity growth. This has almost halved from 9.9% in 2010 to 5.5%, according to the International Monetary Fund. China is simply not the open, agile and innovative economy it once was.
Third, it is now one of few countries experiencing deflation. This is tremendously challenging for China, which is accumulating debt, eye-wateringly fast. During times of deflation, prices and wages fall, but the value of debt does not, raising the burden of repayments. With deflation eating into profits, companies cut wage growth, creating a “debt deflation doom loop” of ever-weaker aggregate demand and deflationary pressures.
Finally, the debt-fuelled property crash goes from bad to horrifying. More than half of the country’s massive developers have defaulted and house prices are in free fall. Analysts warn that the crisis poses a huge risk to the economy, chilling construction activity, cutting household wealth and dampening consumer confidence.
Investors have seen the writing on the wall. About $12-billion of foreign direct investment was cancelled in the third quarter alone, while Chinese investors are making outward investments at a record pace, according to the Financial Times.
Geopolitical consequences
Since 1990, China’s growth in share of global GDP came mostly at the expense of Europe and Japan. In the past two years they have held steady while China has fallen behind the US and other emerging markets, specifically Mexico, Indonesia, India, Poland and Brazil.
Listening to President Xi Jinping and China acolytes, one would never believe it. But no matter what they might argue, the fundamentals paint a different picture.
It is perhaps too soon to argue that the age of Chinese and American bipolarity is giving way to multipolarity. However, as shown by the USSR, waning superpowers struggling to reinvent themselves are the most dangerous and least predictable.
Though a couple of years of data is perhaps too little to form any firm conclusions, the trendlines are clear. China’s moment has passed. Rather than a Thucydides trap of a grand overtaking of the US, the story of the rest of the 21st century will be how these two hegemons manage their declines.