The author is Chairman of Rockefeller International
As we enter the third term, Xi JinpingThe goal is to make China a moderately developed country in the next decade. This means that the economy should expand at a rate of about 5%. However, underlying trends such as poor demographics, high debt and declining productivity growth suggest that the country’s overall growth potential is about half that rate.
The implications of China growing at 2.5% are not yet fully digested, including in Beijing. For example, assuming the U.S. maintains a growth rate of 1.5% with similar inflation and a stable exchange rate, it won’t be until 2060 that China overtakes the U.S. as the world’s largest economy.
Long-term growth depends on more workers using more capital and using it more efficiently (productivity). With a declining population and slowing productivity growth, China has grown by injecting more capital into its economy at an unsustainable rate.
China is now a middle-income country, at a stage where many economies will naturally begin to slow given their higher base. Per capita income is now $12,500, one-fifth of her in the United States. There are now 38 developed countries, all of which have grown beyond her $12,500 income level in the decades following World War II. Only 19 companies grew more than 2.5% over the next 10 years, which was achieved with the help of more workers. On average, the working-age population increased by 1.2% per year. Only two of her countries, Lithuania and Latvia, had a decreasing workforce.
China is an outlier. China will become the first large middle-income country to sustain gross domestic product growth of 2.5% despite a decline in its working-age population that began in 2015. In China, this decline is steeper and tends to shrink at an annual rate of close to 0.5. percent in the coming decades. Next is debt. Debt (including governments, households and businesses) averaged 170% of GDP in her 19 countries, which maintained her 2.5% growth after reaching China’s current income level. No country was as indebted as China.
Before the 2008 crisis, China’s debt was stable at around 150% of GDP. He then began pumping credit to boost growth, and by 2015 debt surged to 220% of his GDP. Insolvency usually leads to a sharp slowdown, and the Chinese economy slowed in his 2010s, by only 10% to 6%. — less dramatic than past patterns predict.
China avoided a more severe slowdown thanks to a booming tech sector and, more importantly, issuing more debt. Total debt reached up to 275% of GDP, much of which was invested in the property bubble.
While capital—mainly real estate investment—has helped boost GDP growth, productivity growth has halved to 0.7% over the past decade. Capital efficiency has collapsed. China now has to invest $8 to generate $1 of GDP growth, twice her level a decade ago and the worst of any major economy.
In this situation, 2.5% growth is achieved. Even if he maintains basic productivity growth at 0.7%, it hardly offsets population decline. To achieve 5% GDP growth, China needs capital growth rates close to her 2010s. Most of that money was spent on physical infrastructure such as roads, bridges and housing. Overall capital growth could return to around 2.5% given the scale of the housing collapses.
The consensus, of course, is that China can meet the targets set by the government, but the consensus projection is that Chinese slowdown In recent years, including this one, growth is likely to fall below 3%. Around 2010, many prominent forecasters thought the Chinese economy would overtake the US economy on a nominal basis by her 2020.
By 2014, some economists argued that China was already the world’s largest economy in terms of purchasing power parity. This is a configuration based on theoretical currency values and has no meaning in the real world. These theorists argued that the renminbi was severely undervalued and should appreciate against the dollar, demonstrating the dominance of the Chinese economy.
Instead, China’s currency has depreciated and its economy remains one-third smaller than the United States in nominal terms. If anything, the optimistic forecast of 2.5% points to heightened tensions between China and its main trading partners, increased government interference in the most productive private sector, technology, and an increase in debt burdens. It downplays risks to growth, such as growing concerns.
China’s 2.5% growth rate has significant implications for its economic, diplomatic and military superpower ambitions. The chances of China shrinking are higher than the world still realizes.