Why and how the Chinese economy will slow down
In geopolitics, overestimating an adversary is as dangerous as underestimating him. Over the past three decades, the United States has made a series of strategic mistakes regarding China. Having woken up late, the United States and its allies could now overreact to the Chinese threat and start calamitous wars. Along with trade wars and sanctions, there is a rapid escalation in military operations by all sides. China is building hundreds of silos for nuclear intercontinental ballistic missiles; the invasion of Taiwan has become a hot topic; and the South China Sea is witness to warships from all over the world – US, UK, Germany, France, India and Australia.
These actions are all based on anxiety about a possible world order dictated by the illiberal Communist Party of China. The cornerstone of this fear is the belief that the Chinese economy will continue to grow and overtake that of the United States. Of course, the country with the biggest economy will end up having the biggest army as well as the most dominant currency. However, China’s continued ascendancy is not a done deal. In my book, I describe two possible scenarios, one of which reveals how China can stumble. Let’s see how.
China has experienced spectacular growth over the past 20 years. However, the next 20 years will be very different due to the confluence of four critical factors: maturing economy, peak in migration, unsustainable debt and demographic challenges. China’s increasingly autocratic government could also become a stumbling block.
The Chinese economy has matured in many ways – wages and productivity are starting to peak, construction has flattened, and consumer markets are saturated. For example, wages in manufacturing have increased tenfold over the past two decades, but now factories are cutting wages to stay competitive. Tech workers and millennials are already tired of culture 996 (working 9am to 9pm, 6 days a week) and can’t work harder. China has already built most of the infrastructure it needs. No more superfluous highways, bridges, high-speed trains, skyscrapers, etc. just to increase GDP. Finally, China’s middle class now has all the essentials – homes, appliances, and gadgets – which means many of the markets that have driven China’s growth in the past are shrinking.
China is also experiencing many woes from developed countries – excessive debt, high inequality, unaffordable housing, expensive education, etc. All of these factors limit discretionary household spending, which has an impact on GDP.
So, it is not surprising that China’s GDP growth rate fell from 14% a few years ago to less than 6% in 2019. Economists predict that it will be 2 to 3% of here the end of this decade.
One of the main pillars of China’s growth over the past 40 years has been the growth of the urban population, which has more than quadrupled. Hundreds of millions of Chinese from rural areas have settled in cities. These “migrants” made China the world factory. These unsung heroes also did all the dangerous and dirty jobs in mining, construction, etc. and built the modern cities of China.
However, what was once the largest human migration in world history has slowed down. Over the next decade, China’s urban population will grow by less than 1% per year. This drastic reduction in migration is reflected in demographics – older migrants (50+) now outnumber young people (16-30).
Fewer and older migrants will affect the factories, construction, and concert sectors (like ridesharing and food / parcel delivery services) that are crucial to China’s growth.
China’s total debt is three times its GDP, not counting the infamous and opaque shadow banks. Many large business conglomerates – including state-owned enterprises – have gone bankrupt in the past two years, or are on the brink of collapse. Evergrande, HNA Group, Anbang Insurance, Huarong Bank, Suning and Wanda are notable examples of mega-companies whose debt-fueled growth ended in disastrous fashion. Chinese household debt has also more than tripled in the past eight years. The systemic risks in the Chinese economy are very real.
China’s total debt has grown an impressive 160% over the past eight years, from $ 16 trillion to $ 42 trillion, while GDP has only grown by 73%. In other words, the debt has grown twice as fast as the GDP.
China has survived thirty years of capitalism without a major financial crisis thanks to meticulous management and government bailouts. But now the system is getting too complex and too big to be saved by the technocrats.
While financial problems can be carried over by printing money, there is no way to defuse the demographic time bomb. The median age in China is now 40. Retiree and elderly populations are growing rapidly – in China, men retire at 60 and women at 55 or 50, depending on employment. There are already around 300 million retirees in China. This phenomenon, combined with the increase in life expectancy, threatens the bankruptcy of the pension fund by 2035.
Chinese couples neither want nor can afford to have more than one child. Thus, young women laugh at the government’s new three-child policy (the disastrous one-child policy ended in 2015 but has not stopped the fertility rate from falling). In addition, young people are delaying marriages and divorce rates are also increasing. For millions of men, marriage is not even an option due to the gender imbalance (there are 116 men for every 100 women in the 15-24 age group). The number of births in 2020 was the lowest since 1961, the year of Mao Zedong’s great famine. This year tends to be worse.
The labor force peaked four years ago and will be 100 million fewer workers by the end of this decade.
By the way, China’s statistics are notoriously rigged as funding for local governments depends on favorable numbers regarding births, schoolchildren, etc. Some rural parents also obtain several birth certificates for their children for different provinces (this is due to the “hukou” system, which determines access to schools, hospitals, etc. This terrible system creates a permanent subclass out of the 280 million migrants and their children). Beijing also likes false figures because they help project a positive image among foreign investors.
Unsurprisingly, experts say China’s total population is overestimated by around 120 million and has already started to decline. The actual fertility rate in China is probably around 1, well below the replacement rate of 2.1.
Maybe Xi Jinping understands the consequences of all these formidable challenges and therefore tries to make China a superpower before its decline becomes apparent.
China’s political regression
Xi Jinping has become Mao v2.0 and the “President of everything”. Xi amended China’s constitution to remove term limits for himself, jailed his political opponents, and crushed what was left of free speech. There is no private media in China, and state media have promised “absolute loyalty” to Xi. Modern-day government censors and Red Guards ensure there is no criticism of Xi and his policies on Chinese social media. Ordinary citizens, bloggers, human rights lawyers and citizen journalists are arrested on spurious charges such as “spreading rumors”, “quarreling” or subversion. In this stifling environment, liberals and reformists have no voice and ultra-nationalism is on the rise.
Without checks and balances, the totalitarian government has also cracked down on the tech industry with capricious and draconian regulations. Chinese tech giants have lost more than $ 1 trillion in market capitalization this year. Whether these attacks are motivated by communist ideology or Xi’s desire to consolidate his power, the bottom line will be detrimental to innovation, the key pillar of economic growth.
Geopolitical calculation errors
In the CCP’s centenary speech this year, Xi Jinping reiterated that “once-in-a-century changes” are imminent. It is a reference to the end of the American century. Since the 2008 financial crisis, the Beijing consensus has been that East rises and west declines. In a way, China now resembles pre-WWI Germany – a rising power too eager to become No.1. However, such proud ambition without honest analyzes of China’s economic and geopolitical challenges will lead to dangerous confrontations. China is still a developing country where 600 million people live on less than $ 200 a month. In addition, China does not have military alliances and even most of its neighbors prefer the United States.
Over the past forty years, China has enjoyed tremendous success under the rules-based international order. Thus, there is no need to question or overturn this system. The strategic imperative for China should be peaceful development, which requires opening up its economy, reforming its state-owned enterprises, implementing the rule of law, raising the standards of human rights. man, the adoption of free speech / free media and the achievement of a secure rapprochement with the United States, Japan, Taiwan, India and others.
China, the United States, and allies of the United States must come to the negotiating table with objective facts rather than wishful thinking or delusions of grandeur. The American century is drawing to a close, but Pax Americana will not be replaced by Pax Sinica in the emerging multipolar world. In this spirit, the aim should be to disengage from the rivalry of the great powers and to pursue economic and technological progress peacefully.