Is China’s high-growth era over – forever?
With its population declining, China’s period of rapid growth is likely over. How it copes is critical for the world.
When much of the world went through a major recession in 2008-2009, China, through enormous government spending efforts, managed to weather the storm and buoy the global economy.
With the world tottering “perilously close” to a global recession on the back of Russia’s war in Ukraine and three years of the COVID-19 pandemic, a repeat of a Chinese-led recovery seems less likely.
The country’s economy expanded by only 3 percent in 2022. Growth is projected to remain slow in the early quarters of 2023 before rebounding strongly in the second half of the year, according to a survey of 37 economists conducted by Nikkei in December. The average GDP growth figure put forth by the group was 4.7 percent, with the vast majority of predictions falling between 4.0 and 5.9 percent.
Yet even the most optimistic recovery scenario for China does not portend a return to the soaring growth rates that the country was used to for decades. China’s GDP has grown at an average of nearly 10 percent annually since Beijing embarked on economic reforms in 1978.
The world’s second-largest economy has had a tumultuous ride since the pandemic first began. After early optimism about its rebound in 2020, repeat crackdowns on the private sector and strict zero-COVID lockdowns have wreaked mayhem on supply chains and damaged investor confidence. And January brought more bad news: The country’s population declined last year for the first time in 60 years, raising worrying questions about its future workforce.
Now, with President Xi Jinping effectively established as China’s leader for life and the country finally transitioning out of zero-COVID, can the country ever hope to return to sustained high growth?
The short answer: No. China’s double-digit growth era is almost certainly over, economists and analysts told Al Jazeera. The growth rate that China does manage to sustain in years ahead will largely depend on how Beijing adapts to the structural challenges facing its economy and the impact of Xi’s new priorities.
Rapid rise, silent fall
China’s years of high GDP growth meant that its economy ballooned more than tenfold between the turn of the century and 2021, from $1.2 trillion to nearly $18 trillion, according to World Bank data. By contrast, the GDP of the United States, the world’s largest economy, is a little more than double its size in 2000.
Over the coming years, however, China’s growth rate will slow down to between 2 and 5 percent, according to estimates by economists Al Jazeera spoke with.
And even that masks a shift that has already been under way, said economist Michael Pettis, a Beijing-based senior fellow at the Carnegie Endowment for International Peace. Focusing on GDP numbers risks missing the forest for the trees – such figures only give an incomplete, time-delayed picture of the Chinese economy. “The high-growth era seems to be ending now as per the numbers, but actually, in terms of productive investment, it ended around 10 to 15 years ago,” he told Al Jazeera.
Pettis said GDP – used initially to measure Western economies – is not built-for-purpose for capturing anomalies caused by China’s “soft budget constraints”, which refers to a model where the state steps in to cover for spending in excess of income earned from a project. For instance, a sewage system built in the Gobi Desert and one in Beijing might add the same value to China’s GDP, despite the former having little economic value.
“[In China], you can continue losing money for a very long time if it’s politically necessary… but it’s not reflective of the underlying productive capacity of the economy,” he said.
Most economists appear convinced that China’s previous growth model has run its course. But with the country’s economy in the midst of a major transition, the future is unclear.
Ageing population, slowing productivity
The unique demographic and economic conditions China leveraged to achieve unprecedented growth in recent decades have faded away.
The vast labour pools that fuelled China’s low-cost industrial base are shrinking as its population ages rapidly. The country’s population decline in 2022 followed years of slowing birth rates.
China will be replaced by India this year as the most populous country in the world amid an accelerating shift by multinationals to move more manufacturing to other parts of Asia, such as Vietnam, Malaysia, India and Bangladesh.
The debt-heavy investments in real estate and infrastructure that have historically driven China’s growth have peaked too. Hung Tran, a senior fellow at the Atlantic Council, said these investments have yielded diminishing returns.
China’s total factor productivity – a measure of how much output an economy actually churns out as a fraction of inputs – is no longer growing as it used to. Before 2008, productivity growth averaged 2.8 percent but has slowed to just 0.7 percent a year since then.
This has left many overleveraged corporations and local governments near breaking point, as evidenced by the implosion of the country’s largest property developer, Evergrande, in 2021.
To be sure, China’s leaders could pull some levers to ease the pain of transition. They could raise the official retirement age for men (60) and women (55) to 65, “increasing the labour participation rate of the economy – a measure successfully employed by Japan”, said Hung. But even that might only partly delay the crisis: Already, the share of China’s population in the 15 to 64 age group is shrinking, after peaking at just under 1 billion in 2015.
Abolishing the hukou system – which ties social benefits to household registration – could increase urbanisation levels, sustaining China’s labour force, Hung said. The system at the moment often leaves migrant workers in cities without state benefits like public schooling, serving as a deterrent to further urbanisation.
Automating more manufacturing by building upon China’s advanced digital infrastructure could also help maintain industrial productivity.
Yet even as Beijing seeks to soften an otherwise turbulent descent into lower-growth altitude, its political leadership is setting new priorities in place for China’s journey.
What Xi wants: Looking within
Xi has shifted Beijing’s policy focus away from a “growth at all costs” mantra pursued by previous post-reform leaders. Instead, he has emphasised “high-quality growth”, which features as a guiding principle in China’s current five-year plan. It is part of Xi’s “new development concept” that prioritises resilience to outside pressure and more equal distribution of China’s wealth.
In essence, the idea is to lessen China’s reliance on export-driven growth by building an economy fuelled by domestic consumption, said experts. A robust internal market can act as a buffer against shocks from a volatile global trading system and Western sanctions. China’s new strategy also aims to reduce China’s carbon footprint while pursuing cutting-edge technologies, like advanced semiconductors and quantum computing. Developing these technologies at home has become even more important for the country amid a wave of tough export control restrictions imposed by the US aimed at crippling China’s chips industry.
But can “high-quality growth” deliver runaway growth rates like before? “In theory, it can, but it hasn’t happened before in history,” said Pettis. “Consumption is the key here.”
Household expenditure as a share of total GDP sat at about 38 percent by the end of 2021, far below the global average of 63 percent, leaving China with one of the weakest consumption levels among the world’s major economies.
“Unless you can get that surge in [household] consumption, GDP is going to be around 2-3 percent at best,” he said.
What slow growth means for China – and the world
The slowing of the Chinese growth engine will impact everyone, though not in the same way.
Many countries, especially those who have come to rely on China as their major export destination, will feel the drop in demand acutely. The speed at which countries can pivot to other faster-growing emerging markets, such as in India and Southeast Asia, will largely determine the winners and the losers during this transition.
The slowdown will also influence the geopolitical power balance. If China peaks economically in the coming decade, its dream of surpassing the US as the world’s biggest power will appear less inevitable. Such a scenario could prod Beijing into taking bolder actions on what it perceives as its “core interests” – such as Taiwan’s status – while at the zenith of its power, experts have warned.
Economists predict turmoil within China too.
Xi has adopted the Mao-era catchphrase of “common prosperity” as a guiding economic principle, turning Beijing’s focus towards addressing inequalities, from housing to healthcare and education. While details on the implementation are scarce, common prosperity has also become the rhetoric of heavy-handed market intervention. China’s tech CEOs, for instance, pledged billions to the cause shortly after a crackdown that erased over a trillion dollars in combined market value from their firms.
“Common prosperity is not really about redistribution in the sense it is understood in the Western welfare models,” said Alicia García-Herrero, Hong Kong-based chief economist for Asia Pacific at investment bank Natixis. After all, China is not increasing its corporate tax rate, which ranges from 15 to 25 percent.
Instead, the Chinese Communist Party (CCP) will target excessive accumulation of wealth for redistribution, but to “whom and how, will be decided ad hoc”, she said.
Still, this shift in Beijing’s focus towards “dividing the pie” is in itself an acknowledgement of China’s new reality. For decades, maintaining high economic growth has been central to the legitimacy of the ruling CCP. Yet, in this new lower-growth era, the nominally communist government may require new narratives to maintain legitimacy in the eyes of the Chinese people.
“Promoting common prosperity is necessary to deal with growing inequality and wealth distribution which could lead to social discontent and unrest,” Hung said.
If China gets it right, it could end up with “slower but hopefully more equitable and sustainable growth”, he said. And a new social contract between the party and the country’s 1.4 billion people.