CHINA
08 October 2023
What’s the future for the “factory of the world”?
China’s economy steamed along until Covid. But government policies decades old are pulling it down. It might already be past its peak.
The Chinese economy is bouncing back only slowly from a “zero-COVID” policy that saw sudden lockdowns in cities across the country.
While the rest of the world struggles with inflation, China has deflation. But youth unemployment is climbing high in China and its economy is in the midst of a real estate bubble and some large companies are on the verge of collapse.
Only recently were most analysts predicting that the Chinese economy would overtake that of the United States. But now it seems equally probable that China may already have reached the height of its economic power. Are we seeing “Peak China”?
Let’s back up.
So when the new Chinese paramount leader, Deng Xiaoping, started granting economic freedom to farmers and small business people beginning in 1979, he unleashed an entrepreneurial spirit and energy. The privatisation of inefficient small- and medium-sized enterprises that were owned by the state also sparked economic initiative.
After personally witnessing the prosperity of the United States and Japan, Deng started to gradually open China to international trade and investment, initially through special economic zones — places where regulations are relaxed.
Over time, China would become the world’s leading trading nation, especially after it joined the World Trade Organisation (WTO) in 2001.
It became known as the “factory of the world.”
Thus, from 1979 until 2010, China’s average annual GDP growth was some 10%, before falling back sharply over the past decade. The strong economy lifted 800 million people out of extreme poverty. In China that meant that these people were now living on incomes above $1.90 per day.
Despite this dramatic economic rise, China’s gross domestic product (GDP) per capita remains modest at around $13,000 – compared with the U.S.’ $80,000 — placing it below 63 other countries. But thanks to its enormous population of 1.4 billion, China now has the world’s biggest GDP when estimated in purchasing power parity terms, a measure of the price of specific goods in different countries.
This means that China has transformed itself into a great power that is challenging the United States for dominance in the Indo-Pacific region, and even globally.
The case of China shows that economic catchup can proceed quickly in the early phases. But it becomes more challenging as countries climb the development ladder, and difficult challenges must be tackled.
The total population began to decline last year and its working age population could decline by nearly a quarter, to some 700 million, by mid-century. Declining numbers of workers is hurting the economy and national budget.
China was admired for its decisive response to the 2008–09 global financial crisis, when it launched a massive fiscal stimulus package.
This kept the Chinese economy growing and provided a welcome stimulus to the world economy. But ever since, China has relied on debt-fuelled growth. Thus, China is now burdened with an enormous national debt of close to 300% of GDP, more than double that at the outset of the global crisis.
With much of this fiscal stimulus being directed to the state-owned enterprises rather than the private sector, it is hardly surprising that China’s productivity growth since the crisis has fallen by half, to 2.25% a year. Measures to crack down on China’s private sector have done little to raise productivity.
The giant corporations that have built these projects are now having severe financial problems.
At the same time, relations with Western countries have deteriorated in light of China’s failure to fully implement its commitments to the World Trade Organisation.
Western nations also believe that China has engaged in widespread intellectual property theft and cyber-intrusions. They complain of discrimination by China against Western companies and industry policies that protect its own businesses.
China’s repression of local society, its assertive international behaviour and its support for Russia have all tarnished relations with the West. In response, Western governments are adopting restrictions on trade, investment and access to technology.
China’s economic doldrums seem to have come out of the blue. The reality is that China’s economic woes have been building up for a long time, and have combined with the adverse economic consequences of its ill-judged “zero-COVID” policy.
The fundamental problem is that China’s President Xi Jinping worries too much about social stability, national security and political loyalty. He seems fearful of taking bold economic measures.
He denies the old wisdom that to make an omelet, you must break a few eggs.
While the rest of the world struggles with inflation, China has deflation. But youth unemployment is climbing high in China and its economy is in the midst of a real estate bubble and some large companies are on the verge of collapse.
Only recently were most analysts predicting that the Chinese economy would overtake that of the United States. But now it seems equally probable that China may already have reached the height of its economic power. Are we seeing “Peak China”?
Let’s back up.
Rise of Chinese economic power
During the reign of Mao Zedong from 1949 to 1976, repressive, state-dominated policies resulted in abject poverty for the majority of the Chinese population.So when the new Chinese paramount leader, Deng Xiaoping, started granting economic freedom to farmers and small business people beginning in 1979, he unleashed an entrepreneurial spirit and energy. The privatisation of inefficient small- and medium-sized enterprises that were owned by the state also sparked economic initiative.
After personally witnessing the prosperity of the United States and Japan, Deng started to gradually open China to international trade and investment, initially through special economic zones — places where regulations are relaxed.
Over time, China would become the world’s leading trading nation, especially after it joined the World Trade Organisation (WTO) in 2001.
It became known as the “factory of the world.”
Powering the economy through policy
The Chinese government also supported its development through high-quality education and physical infrastructure. China benefited from its youthful population, especially as large numbers moved from the countryside to towns and cities to work in manufacturing, construction and services.Thus, from 1979 until 2010, China’s average annual GDP growth was some 10%, before falling back sharply over the past decade. The strong economy lifted 800 million people out of extreme poverty. In China that meant that these people were now living on incomes above $1.90 per day.
Despite this dramatic economic rise, China’s gross domestic product (GDP) per capita remains modest at around $13,000 – compared with the U.S.’ $80,000 — placing it below 63 other countries. But thanks to its enormous population of 1.4 billion, China now has the world’s biggest GDP when estimated in purchasing power parity terms, a measure of the price of specific goods in different countries.
This means that China has transformed itself into a great power that is challenging the United States for dominance in the Indo-Pacific region, and even globally.
The case of China shows that economic catchup can proceed quickly in the early phases. But it becomes more challenging as countries climb the development ladder, and difficult challenges must be tackled.
Manufacturing needs workers.
In 1980, to address fears of overpopulation, China implemented its “one-child policy”, restricting each family to one child. One consequence was that China’s working-age population peaked in 2011 at more than 900 million.The total population began to decline last year and its working age population could decline by nearly a quarter, to some 700 million, by mid-century. Declining numbers of workers is hurting the economy and national budget.
China was admired for its decisive response to the 2008–09 global financial crisis, when it launched a massive fiscal stimulus package.
This kept the Chinese economy growing and provided a welcome stimulus to the world economy. But ever since, China has relied on debt-fuelled growth. Thus, China is now burdened with an enormous national debt of close to 300% of GDP, more than double that at the outset of the global crisis.
With much of this fiscal stimulus being directed to the state-owned enterprises rather than the private sector, it is hardly surprising that China’s productivity growth since the crisis has fallen by half, to 2.25% a year. Measures to crack down on China’s private sector have done little to raise productivity.
A real estate boom created “ghost cities.”
Since the global financial crisis, real estate has been an important component of the Chinese economy, now accounting for 25%. But China’s real estate boom has been based on reckless lending and poorly-conceived projects that have left “ghost cities” whereby whole cities have been erected only to attract no residents.The giant corporations that have built these projects are now having severe financial problems.
At the same time, relations with Western countries have deteriorated in light of China’s failure to fully implement its commitments to the World Trade Organisation.
Western nations also believe that China has engaged in widespread intellectual property theft and cyber-intrusions. They complain of discrimination by China against Western companies and industry policies that protect its own businesses.
China’s repression of local society, its assertive international behaviour and its support for Russia have all tarnished relations with the West. In response, Western governments are adopting restrictions on trade, investment and access to technology.
China’s economic doldrums seem to have come out of the blue. The reality is that China’s economic woes have been building up for a long time, and have combined with the adverse economic consequences of its ill-judged “zero-COVID” policy.
The fundamental problem is that China’s President Xi Jinping worries too much about social stability, national security and political loyalty. He seems fearful of taking bold economic measures.
He denies the old wisdom that to make an omelet, you must break a few eggs.