We shouldn’t call it “peak China” yet

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What is China’s economic future? Will it become a high-income economy and therefore, inevitably, the largest in the world for a prolonged period, or will it remain stuck in the “middle income” trap, with growth comparable to that of the United States? United ? This is a vital question for the future of the global economy. This is no less vital for the future of world politics.

The implications can be seen quite simply. According to the IMF, China’s gross domestic product per capita (measured in purchasing power) was 28% of the US level in 2022. This is almost exactly half of Poland’s relative GDP per capita. It also ranks China 76th in the world in terms of GDP per capita, between Antigua and Barbuda at the top and Thailand at the bottom. Yet despite its relative poverty, China’s GDP (measured this way) is the largest in the world. Now suppose that its relative GDP per capita doubles to match that of Poland. Its GDP would then be more than double that of the United States and higher than that of the United States and the EU combined.

Size matters. China will surely remain a very populated country for a long time to come. In 2050 for example, according to the UN, it will still have 1.3 billion inhabitants.

The question regarding China’s future in the world can therefore be rephrased as follows: can it achieve the same level of prosperity as Poland compared to the United States? This would represent a further doubling of its relative GDP per capita. Is it really going to be that hard? Before concluding that this will be the case, it is worth noting that China’s GDP per capita, relative to that of the United States, has increased from 2% to 28% of the American level over 42 years, from 1980 to 2022 This represents a little less than four doublings. Is a further doubling, say over 20 years, inconceivable?

A comparison might help answer this question. South Korea is a country that almost matched China’s performance after World War II. In the early 1960s, its GDP per capita was about 9 percent of the U.S. level. It took about a quarter of a century from 1980 for China to reach this point. In 1988, Korea reached 28 percent of U.S. levels, where China is today. In 2007, it reached 57 percent of U.S. levels, where Poland is today. Today it reaches 70 percent. If China matched this level, it would reach the relative level of Poland in 2022 in the 2040s and 70% of the American level in the 2050s. It would be a new world. (See graphs).

Before rejecting this comparison out of hand, it is important to avoid a few errors. Much attention is currently being paid to China’s slowdown, its overreliance on real estate investments and its financial fragility. This is all understandable. But that could also be an exaggeration. South Korea was hit by several major crises, including the debt crisis of 1982 and the Asian financial crisis of 1997. Yet in response to these shocks, Korea adapted and moved on. It has not experienced prolonged relative stagnation, like Japan after 1990. On the contrary, Korea, whose GDP per capita was a third of that of Japan in the 1950s, is today richer than its former master imperial. By the way, Taiwan did even better than South Korea. It’s no wonder so many Taiwanese want to remain independent.

Certainly, one can offer a long list of reasons why China must have reached the end of the road in its incredibly rapid catch-up with economies on the technological frontier. These include population aging, structural imbalances, financial fragility, global environmental deterioration, and today’s arbitrary and oppressive government. These are all perfectly legitimate points.

The most intractable economic problem is the overreliance on credit-fueled investment, not consumption, as a source of demand, and the parallel overreliance on capital accumulation, not innovation, as source of growing supply. Thus, from 2009 to 2022 (inclusive), the contribution of increases in “total factor productivity” (a measure of efficiency in the use of resources) has averaged about 0.5 percentage points per year, well below the two percentage points per year obtained from 2000 to 2008. It is also much too slow.

But it is also worth remembering the strengths of this vast country, which trains 1.4 million engineers per year, has the most active patent office in the world, has a very entrepreneurial population and shows world-leading potential. in, to take just one example, electricity. Vehicles. In the IT field, it already seems well ahead of the Europeans. In summary, can China really not compete with Poland?

The biggest questions about the future of China’s economy concern politics, both domestic and global. Domestically, does China have leadership that wants to pursue rapid growth or is it now inclined to view stability as more desirable? Is it prepared to take the necessary measures not only to increase demand now, but also to tackle the structural problems of over-saving and over-investment, over-reliance on the housing market, excessive debt? , etc. ? Is she ready to give private companies the upper hand again, or is she determined to keep them under firm (and inevitably intimidating) control? Can he convince the Chinese people that after the trauma of Covid, they can have confidence in the future again? Adam Posen of the Peterson Institute of International Economics argued forcefully that this was not the case. I am not convinced. They changed in the late 1970s, on a much larger scale. Of course, the management has also changed. Will it be this time too? Or is it fixed for years in advance?

Equally important is the unfavorable global environment. China’s access to global markets and technology is deteriorating. There is even a risk of war. It will take great determination to overcome the first and wisdom to avoid the second.

So yes, it is indeed possible that we are witnessing the end of China’s rise. But this is not inevitable. Above all, what happens will depend more on Chinese choices than Western wishes.

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