(WSJ); For decades, China powered its economy by investing in factories, skyscrapers and roads. The model sparked an extraordinary period of growth that lifted China out of poverty and turned it into a global giant whose export prowess washed across the globe.
Now the model is broken. Economists now believe China is entering an era of much slower growth, made worse by unfavourable demographics and a widening divide with the U.S. and its allies, which is jeopardising foreign investment and trade. Rather than just a period of economic weakness, this could be the dimming of a long era.
What worked when China was playing catch-up makes less sense now that the country is drowning in debt and running out of things to build. Parts of China are saddled with under-used bridges and airports. Millions of apartments are unoccupied. Returns on investment have sharply declined.
Signs of trouble extend beyond China’s dismal economic data to distant provinces, including Yunnan in the southwest, which recently said it would spend millions of dollars to build a new Covid-19 quarantine facility, nearly the size of three football fields, despite China having ended its “zero-Covid” policy months ago, and long after the world moved on from the pandemic.
What will the future look like? The International Monetary Fund puts China’s GDP growth at below 4% in the coming years, less than half of its tally for most of the past four decades. Capital Economics, a London-based research firm, figures China’s trend growth has slowed to 3% from 5% in 2019, and will fall to around 2% in 2030.
At those rates, China would fail to meet the objective set by President Xi Jinping in 2020 of doubling the economy’s size by 2035. That would make it harder for China to graduate from the ranks of middle-income emerging markets and could mean that China never overtakes the U.S. as the world’s largest economy, its longstanding ambition.
Even so, economists widely believe that China has entered a more challenging period, in which previous methods of boosting growth yield diminishing returns.
Some of these strains were apparent before the pandemic. Beijing was able to keep growth ticking over by borrowing more and relying on a booming housing market, which in some years accounted for more than 25% of China’s gross domestic product.
Unlike Japan, however, China would be entering such a period before reaching rich-world status, with per capita incomes far below than more advanced economies. China’s national income per person reached about $12,850 last year, below the current threshold of $13,845 that the World Bank classifies as the minimum for a “high-income” country. Japan’s per capita national income in 2022 was about $42,440, and the U.S.’s was about $76,400.
A weaker Chinese economy could also undermine popular support for Xi, the most powerful Chinese leader in recent decades, though there is no current indication of organized opposition. Some U.S. analysts worry Beijing could respond to slower growth by becoming more repressive at home and more aggressive abroad, raising the risks of conflict, including potentially over the self-governing island of Taiwan.
Kenneth Rogoff, a professor of economics at Harvard University, said China’s economic ascent draws parallels to what many other Asian economies went through during their periods of rapid urbanisation, as well as what European countries such as Germany experienced after World War II, when major investments in infrastructure boosted growth.
At the same time, decades of overbuilding in China resembles Japan’s infrastructure construction boom in the late 1980s and 1990s, which led to over investment.
“The leading point is they are running into diminishing returns in building stuff,” he said, “There are limits to how far you can go with it.”
China’s labor force, meanwhile, is shrinking, and productivity growth is slowing. From the 1980s to the early 2000s, productivity gains contributed about a third of China’s GDP growth, Hofman’s analysis shows. That ratio has declined to less than one sixth in the past decade.
The solution for many parts of the country has been to keep borrowing and building. Total debt, including that held by various levels of government and state-owned companies, climbed to nearly 300% of China’s GDP as of 2022, surpassing U.S. levels and up from less than 200% in 2012
In Beijing’s corridors of power, senior officials have recognised that the growth model of past decades has reached its limits. In a blunt speech to a new generation of party leaders last year, Xi took aim at officials for relying on borrowing for construction to expand economic activities.
The most obvious solution, economists say, would be for China to shift toward promoting consumer spending and service industries, which would help create a more balanced economy that more resembles those of the U.S. and Western Europe. Household consumption makes up only about 38% of GDP in China, relatively unchanged in recent years, compared with around 68% in the U.S., according to the World Bank.
Changing that would require China’s government to undertake measures aimed at encouraging people to spend more and save less. That could include expanding China’s relatively meager social safety net with greater health and unemployment benefits.
Last week, just as Beijing released a barrage of disappointing economic data, the party’s premier journal, Qiushi, published a speech made by Xi six months earlier to senior officials, in which the leader emphasised the importance of focusing on long-term goals instead of pursuing Western-style material wealth. “We must maintain historic patience and insist on making steady, step-by-step progress,” Xi said in the speech.