China’s future isn’t what it used to be
By Paul Krugman
The world’s two most powerful leaders have just had very different years.
At the beginning of 2022, Joe Biden was widely portrayed as a failed president. His legislative agenda appeared stalled, while economic troubles seemed to guarantee devastating losses in the midterms. What happened instead was that the Inflation Reduction Act — which is mainly a game-changing climate bill — was enacted; the much-hyped “red wave” was a ripple; and while many economists are still predicting a recession, unemployment is still low and inflation has been subsiding.
By contrast, early this year Xi Jinping, China’s paramount leader, was still boasting about his triumph over COVID-19. Indeed, for a while, people commonly heard assertions that China’s apparent success in pandemic management heralded its emergence as the world’s leading power. Now, however, Xi has abruptly ended his signature “zero COVID” policy, with all indications pointing to a huge surge in hospitalizations and deaths that will stress health care to the breaking point; the Chinese economy seems set to face major problems over the next two or three years; and long-term projections of Chinese economic growth are being marked down.
China’s future, it seems, is not what it used to be. Why?
China’s ability to limit the spread of the coronavirus with draconian lockdowns was supposed to demonstrate the superiority of a regime that doesn’t need to consult the public, that can simply do what needs to be done. At this point, however, Xi’s refusal to make preparations to move on, his failure to adopt the most effective vaccines and get shots in the arms of his most vulnerable citizens, have highlighted the weakness of authoritarian governments in which nobody can tell the leader when he’s getting it wrong.
Beyond the imminent prospect of carnage, China’s long-running macroeconomic problems seem to be reaching a tipping point.
It has been obvious for years that China’s economy, despite an awesome history of economic growth, is wildly unbalanced. Too few of the gains from growth have trickled down to households, keeping consumer spending low as a share of gross domestic product. Extremely high rates of investment have filled the gap — but all indications are that investment is running into severely diminishing returns, with businesses ever more reluctant to spend on new ventures.
China has nonetheless managed to retain full employment — but mainly by promoting an enormous housing bubble. China’s real estate sector is incredibly bloated: According to one estimate, it accounts for 29% of GDP, with investment in real estate as a share of GDP running twice as high as it did in the United States at the height of the 2000s bubble.
This isn’t a sustainable state of affairs. Economists often cite Stein’s Law: “If something cannot go on forever, it will stop.” Exactly how China’s bubble will end isn’t clear — it might be a sharp slowdown, or it might be a period of “low quality” growth that masks the true extent of the problem, but it won’t be pretty.
What has really struck me, however, is the way analysts have been marking down their longer-term projections for Chinese growth.
Two caveats here.
First, nobody is very good at predicting long-term growth; as Massachusetts Institute of Technology economist Robert Solow famously quipped, attempts to explain differences in national growth rates often end in a “blaze of amateur sociology.”
Second, when measuring the size of national economies, you need to distinguish between the dollar value of GDP and output measured at “purchasing power parity,” which is normally higher in lower-income economies, where the cost of living tends to be relatively low.
On the latter measure, estimates suggest that China overtook the United States around 2016. But the dollar measure is arguably more important when it comes to geopolitical influence. So when will China take the lead?
Recently Goldman Sachs, which formerly projected China as No. 1 by the mid-2020s, pushed that date back to 2035. The Japan Center for Economic Research, which previously projected Chinese leadership by 2028, then 2033, now says that it won’t happen for at least several decades. Some analysts don’t think it will ever happen.
Where does this newfound pessimism come from? Part of the issue is demography. China’s working-age population has actually been declining since 2015. The Chinese economy can still grow rapidly if it can sustain rapid productivity growth. But China’s policy missteps seem to have reinforced the perception that it’s entering the “middle-income trap,” a widely claimed (although controversial) phenomenon in which some poorer nations achieve rapid catch-up, but only up to a point, and stall out well below the income levels of the most advanced economies.
None of this should be taken to detract from the incredible rise in Chinese living standards over the past four decades, nor as a denial that China has already become an economic superpower. But if you were expecting Chinese economic dominance, you may have to wait for a long time. As I said, China’s future isn’t what it used to be.