“The East is rising, the West is declining”, according to the story propagated by the Chinese Communist Party (CCP). Many outside of China take its “inevitable rise” as read. On the way to becoming a “modern socialist country” by 2035, and rich, powerful and dominant by 2049, the centenary of the People’s Republic, China wants to claim the right to brag when its GDP exceeds that of the United States. United, and project its power based on its growing economic weight.
There is, however, a critical flaw in this narrative. The Chinese economy may not overtake that of the United States as it succumbs to the proverbial middle-income trap. This is where the relative development progress of countries relative to richer nations stops, and is normally characterized by difficult economic adjustment and often unpredictable political consequences.
Historically, China’s growth miracle has been remarkable. During the 1930s to 1990. Monetary GDP (the market value of goods and services produced in an economy) for China and the United States in US dollars grew more or less in tandem to just over 6% and 8% per year, respectively. . But over the next three decades, China’s GDP growth doubled to over 13%, while that of the United States halved to 4.5%. This increased China’s GDP from 5% of US GDP to 66%.
Yet China’s growth spurt is now over and the huge disparity in GDP growth has been eliminated. In recent quarters, China’s GDP has grown half as fast as that of the United States. While this gap is likely unsustainable, the $ 9 billion margin of US GDP over China means that comparable GDP growth rates going forward will maintain and even widen the margin. A Japanese think tank recently extended the date it expects China to overtake the United States from 2029 to 2033. Deferrals like this are now a feature, and there will be more.
The problem, however, is less a question of mathematics and more of why China is at a crossroads.
Remember we have been here before. In the 1930s, Germany would dominate Europe, if not the world. In the 1960s and 1980s, the Soviet Union – which had already overtaken the United States in space technology – and later Japan, which was the planet’s rising economic force, would overtake in 10 at 20 years America to become the dominant country. economic and technological power.
The story has not been kind to the consensus. There is a serial tendency dating back to the 1920s to underestimate the self-correcting capacity of American institutions and businesses. Likewise, the Soviet Union and Japan both pursued similar development models, based on distortions that emphasized unsustainable and excessively high savings, high investments, and ultimately high indebtedness. Their development models have cracked with spectacular consequences attributable to chronic failures of institutions and governance.
China is our 21st century version of this phenomenon. Its investment rate is 10 percentage points of GDP higher than it was at its highest in the USSR and Japan, and strongly associated with poor allocation and inefficiency of capital, as well as problems widespread debt service.
Its zero Covid policy could maintain barriers between China and the global economy until 2023 or even beyond, but that aside, a prolonged slowdown in trend growth, exacerbated by over-indebtedness and the now tipping point of real estate, as crumbling development giant Evergrande illustrates, is already on the way. China’s $ 60 billion real estate sector is four times the GDP and accounts for a quarter to a third of annual growth. It faces years of delicate adjustment, especially as developers reduce debt, the age cohort of first-time buyers contracts, and possibly house prices fall.
In addition, China’s economic structure is unbalanced. It has a per capita income equivalent to Mexico, but a per capita consumption that is not higher than that of Peru. Consumer spending represents around 37% of GDP, slightly more than in 2010 and much less than in 2000. Productivity growth, closely associated with liberalization reform, has stalled.
China’s development model needs an urgent makeover to avoid the middle-income trap. The longer it is delayed, the higher the costs. Chinese leaders recognize that change is necessary, and Xi Jinping recently relaunched the slogan of “common prosperity” to mobilize the Communist Party and citizens around a strategy to reduce incomes and regional inequalities and improve standards. of life.
Yet these political goals require precisely the kind of liberalizing, progressive and redistributive economic reforms that Xi Jinping opposes. He pursued an increasingly ideological and totalitarian style of governance in which the already dominant position of the party and the state in the economy was further strengthened.
In a perverse way, he created a contradiction in which even the CCP’s expertise in dialectical argumentation can be of little help. The recent blizzard of new laws and regulations targeting private businesses and entrepreneurs, for example, is designed to nail party control and bring the private sector to the political heel. This is hardly compatible with the productivity growth and innovation on which China’s noble economic ambition depends.
Passing the United States will require more than storytelling. It requires policies that Xi’s China is opposed to, and may well remain a mirage. The consequences for China and the rest of the world have not been properly reflected.