Why and how China’s economy will slow down

The goal should be to disengage from great power rivalry and peacefully pursue economic and technological progress.

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In geopolitics, overestimating an opponent is as dangerous as underestimating them. For the last three decades, the U.S. made series of strategic errors regarding China. Having belatedly woken up, the U.S. and its allies might now overreact to the China threat and spark calamitous wars. Along with trade wars and sanctions, there is a rapid escalation of military operations by all sides. China is building hundreds of silos for nuclear intercontinental ballistic missiles; invasion of Taiwan has become a hot topic; and South China Sea is witnessing warships from all over the world – USA, UK, Germany, France, India, and Australia.

These actions are all predicated on the anxiety about a possible world order dictated by the illiberal communist party of China. The cornerstone of that fear is the belief that China’s economy will continue to grow and surpass the USA. Of course, the country with the largest economy will eventually have the largest military as well as the most dominant currency. However, China’s uninterrupted ascendance is not a fait accompli. In my book, I describe two possible scenarios, one of which reveals how China can stumble. Let’s see how.

China experienced spectacular growth in the last 20 years. However, the next 20 years will be very different due to a confluence of four critical factors: Maturing economy, peak migration, unsustainable debt, and demographic challenges. China’s increasingly autocratic government may also become a stumbling block.

Mature Economy

The Chinese economy has matured in many ways — wages and productivity are starting to peak, construction has flattened, and consumer markets are getting saturated. For example, manufacturing wages grew tenfold in the last two decades, but now factories are slashing wages to stay competitive. Hi-tech workers and millennials are already tired of the 996 culture (working 9am to 9pm, 6 days a week) and cannot work any harder. China has already built most of the infrastructure it needs. No more superfluous highways, bridges, bullet trains, skyscrapers etc. just to boost the GDP. Finally, China’s middle class now has all the essentials – homes, appliances, and gadgets – which means that many of the markets that turbocharged China’s growth in the past are shrinking.

China is also experiencing many of the woes of developed countries – excessive debt, high inequality, unaffordable housing, expensive education etc. All these factors limit discretionary household spending, which in turn impacts the GDP.

Thus, it’s not surprising that China’s GDP growth rate has steadily fallen from 14% a few years ago to under 6% in 2019. Economists predict that it will be 2-3% by the end of this decade. 

Peak Migration

 One of the key pillars of China’s growth in the last 40 years was the growth in urban population, which grew more than four times. Staggering hundreds of millions of Chinese from rural areas moved to the cities. These “migrants” turned China into the factory of the world. These unsung heroes also performed all the dangerous and dirty jobs in mining, construction etc. and built China’s modern cities.

However, what was once the biggest human migration in the world’s history has slowed down to a trickle. In the next decade, the China’s urban population will grow at less than 1% a year. This drastic reduction in migration is reflected in demographics – old migrants (50+) now outnumber the young ones (16-30).

Fewer and older migrants will affect factories, construction, and gig sectors (like ride-hailing and food/package delivery services) which are crucial for China’s growth.

Unsustainable Debt

China’s total debt is three times as large as its GDP — without including the infamous and opaque shadow banking. Many large corporate conglomerates – including state-owned enterprises – have gone bankrupt in the last two years, or they are teetering on the edge. Evergrande, HNA group, Anbang insurance, Huarong bank, Suning, and Wanda are notable examples of mega-corporations whose debt-fueled growths have ended disastrously. Chinese household debts have also more than tripled in the last eight years. The systemic risks in China’s economy are very real.

China’s total debt has grown stunning 160% in the last eight years — from $16 trillion to $42 trillion — while the GDP grew only 73%. In other words, debt has grown twice as fast as GDP. 

China has survived thirty years of capitalism without a major financial crisis through meticulous management and government bailouts. But now the system is getting too complex and too big to be rescued by the technocrats.

Demographic Crisis

While financial problems can be postponed by printing money, there is no way to defuse the demographic time bomb. The median age in China is now 40. Retired and senior citizens’ populations are increasing rapidly — in China, men retire at 60 and women retire at 55 or 50, depending on the job. There are already about 300 million retired people in China. This phenomenon, combined with increasing life expectancy, threatens to bankrupt the pension fund by 2035.

Chinese couples neither want to nor can afford to have more than one child. Thus, young women are laughing at the government’s new three-child policy (the disastrous one-child policy ended in 2015 but hasn’t stopped the decline in fertility rate). Moreover, young people are delaying marriages, and divorce rates are rising too. For millions of men, marriage is not even an option because of the unbalanced gender ratio (there are 116 men to 100 women in the age group of 15-24). The number of births in 2020 was the lowest since 1961, the year of Mao Zedong’s great famine. This year is trending to be worse.

The labor force peaked four years ago and will have 100 million fewer workers by the end of this decade. 

By the way, China’s statistics are notoriously rigged since funding for local governments depends on favorable numbers regarding births, school children etc. Some rural parents also get multiple birth certificates for their kids for different provinces (this is due to the “hukou” system, which determines access to schools, hospitals etc. This terrible system creates a permanent underclass out of the 280 million migrants as well as their children). Beijing also likes fake numbers since they help project a positive image to foreign investors. 

Not surprisingly, experts say that China’s total population is overstated by about 120 million and has already started shrinking. The real fertility rate in China is likely around 1, well below the replacement rate of 2.1.

Perhaps Xi Jinping understands the consequence of all these formidable challenges and thus is trying to cement China as a superpower before its decline becomes apparent.

China’s Political Regression

Xi Jinping has become Mao v2.0 and the “Chairman of Everything.” Xi amended China’s constitution to remove term limits for himself, jailed his political opponents, and has crushed what was left of free speech. There is no private media in China, and the state-media has pledged “absolute loyalty” to Xi. Government censors and modern-day Red Guards ensure that there is no criticism of Xi and his policies on Chinese social media. Ordinary citizens, bloggers, human rights lawyers, and citizen journalists get arrested on spurious charges such as “spreading rumors,” “picking quarrels,” 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 been cracking down on the tech industry with capricious and draconian regulations. China’s tech giants have lost more than $1 trillion in market cap this year. Whether these onslaughts are driven by communist ideology or Xi’s desire to consolidate power, the net result will be detrimental to innovation, the key pillar of economic growth.

Geopolitical Miscalculations

In the CCP’s centennial speech this year, Xi Jinping reiterated that “once-in-a-century changes” are imminent. This is a reference to the end of the American Century. Since the 2008 financial crisis, the Beijing consensus has been that The East is rising and the West is declining. In a way, China now resembles pre-WW1 Germany – a rising power that is too anxious to become #1. However, such a hubristic ambition without honest analyses 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. Also, China has no military alliances and even most of its neighbors prefer the U.S. 

Conclusion

For the last forty years, China has succeeded wildly under the international rules-based order. Thus, there is no need to challenge or upend that system. The strategic imperative for China should be peaceful development, which requires opening up its economy, reforming its state-owned enterprises, implementing rule of law, raising human rights standards, embracing free speech/free media, and achieving security rapprochement with the U.S., Japan, Taiwan, India and others. 

China, the United States, and America’s allies need to come to the negotiation table with objective facts instead of wishful thinking or delusions of grandeur. The American Century is coming to a close, but Pax Americana will not be replaced by Pax Sinica in the emerging multipolar world. With that in mind, the goal should be to disengage from great power rivalry and peacefully pursue economic and technological progress.

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