The writer is president of Rockefeller International
As he enters a third term in office, Xi Jinping’s goal is to make China a moderately developed country over the next decade, meaning the economy should grow by about 5 percent. But underlying trends — poor demographics, high debt and declining productivity growth — suggest the country’s overall growth potential is about half that percentage.
The implications of China’s growth of 2.5 percent have yet to be fully processed anywhere, including Beijing. For starters, assuming the US grows at 1.5%, with comparable inflation rates and a stable exchange rate, China wouldn’t overtake America as the world’s largest economy until 2060, or ever.
Long-term growth depends on more employees using more capital and using it more efficiently (productivity). China, with a shrinking population and declining productivity growth, has grown by injecting more capital into the economy at an unsustainable pace.
China is now a middle-income country, a phase in which many economies naturally begin to slow given the higher base. Per capita income is currently $12,500, one-fifth that of the US. There are 38 advanced economies today, and they all grew past the $12,500 income level in the decades following World War II — most of them quite gradually. Only 19 grew 2.5 percent or faster over the next 10 years, thanks to a boost from more employees; On average, the working population grew by 1.2 percent per year. Only two (Lithuania and Latvia) had a shrinking workforce.
China is an outlier. It would be the first major middle-income country to maintain gross domestic product growth of 2.5 percent, despite the decline in the working-age population that began in 2015. percent in the coming decades. Then there’s the blame. In the 19 countries that maintained growth of 2.5 percent after reaching China’s current income levels, debt (including government, households and corporations) averaged 170 percent of GDP. None of them had debts nearly as high as China’s.
Before the 2008 crisis, China’s debt remained stable at about 150 percent of GDP; then credit started pumping out to boost growth, and debt rose to 220 percent of GDP in 2015. Debt showers normally lead to a sharp slowdown, and the Chinese economy slowed in the 2010s, but only by 10 percent to 6 percent — less dramatic than previous patterns would predict.
China avoided a deeper slowdown thanks to a boom in the technology sector and, most importantly, by issuing more debt. Total debt amounts to a maximum of 275 percent of GDP, and much of it financed investment in the real estate bubble, which was all too much wasted.
While capital, primarily real estate investment, helped boost GDP growth, productivity growth has halved to 0.7 percent over the past decade. The efficiency of capital collapsed. China now needs to invest $8 to generate $1 in GDP growth, twice the level it was ten years ago, and the worst of any major economies.
In this situation, 2.5 percent growth is an achievement. Maintaining a base productivity growth of 0.7 percent will hardly compensate for the population decline. To achieve 5 percent GDP growth, China would need capital growth close to that seen in the 2010s. Most of that money went to physical infrastructure: roads, bridges and housing. Given the magnitude of the housing crisis, aggregate capital growth is likely to fall to around 2.5 percent.
Of course, the consensus is that China can achieve any goal the government sets, but consensus forecasts have failed to recognize the pace of China’s slowdown in recent years, including this one when growth is likely to fall below 3 percent. Around 2010, many prominent forecasters believed that the Chinese economy would catch up with the US in nominal terms by 2020.
In 2014, some economists claimed that China was already the world’s largest economy in terms of purchasing power parity — a construct based on theoretical currency values with no real-world significance. These theorists argued that the yuan was severely undervalued and would certainly appreciate against the dollar, exposing the dominance of the Chinese economy.
Instead, the Chinese currency has depreciated and the economy is still a third smaller than the US in nominal terms. If anything, 2.5 percent is an optimistic forecast that downplays risks to growth, including rising tensions between China and its major trading partners, increasing government interference in the most productive private sector — technology — and rising debt concerns.
China’s 2.5 percent growth has major consequences for its ambitions as an economic, diplomatic and military superpower. A smaller China is more likely than the world has yet realized.