Peak China: Can Asia’s giant ever overtake the US economy?

WEB DESK: China’s ambition to be the world’s largest economy has been dented by COVID, the real estate crisis and an ageing population. Boosting growth will be top of mind as Communist Party officials prepare to meet in Beijing.

The idea of China outstripping the United States to become the world’s largest economy has been a fixation for policymakers and economists for decades. What will happen, they argue, when the US — one of the most dynamic, productive economies — is usurped by an authoritarian regime with a three-quarter-of-a-billion-strong workforce?

Predictions of when exactly China would steal the US crown have come thick and fast ever since the 2008/9 financial crisis, which hampered growth in the US and Europe for many years. Before the Great Recession, China saw double-digit annual gross domestic product (GDP) growth for at least five years. In the decade following the crisis, the Chinese economy still expanded by between 6 and 9% annually. That is until COVID struck.

As if the pandemic — which brought draconian lockdowns and the economy to its knees — wasn’t enough, the Asian powerhouse was also plunged into a real estate crash. At its peak, the property market was responsible for a third of China’s economy. However, rules introduced by Beijing in 2020 put limits on how much debt property developers could take on. So many firms went bankrupt, leaving as many as 20 million unfinished or delayed unsold homes.

Worsening trade relations with the West also weakened growth in the world’s second-largest economy around the same time. Having encouraged China’s ascendancy for decades, by the late 2010s the US realized it had to contain Beijing’s economic and military ambitions, if only to delay the inevitable advance.

Has China’s economy peaked?

The apparent change of fortunes for the Chinese economy was so stark that a new term emerged about a year ago — Peak China. The theory was that the Chinese economy was now burdened by many structural issues — a heavy debt load, slowing productivity, low consumption and an aging population. Those weaknesses, along with geopolitical tensions over Taiwan and a decoupling of trade by the West, sparked speculation that China’s impending economic supremacy may be delayed or never happen.

Peak China is a “myth,” Wang Wen, Executive Dean and Professor at Renmin University of China’s Chongyang Institute for Financial Studies, told DW, adding that China’s total economic output reached almost 80% of the US output in 2021.

Wang said as long as Beijing maintains “internal stability and external peace,” the Chinese economy will soon overtake the US. He cited the desire of millions of rural Chinese to move to urban areas, where earnings and quality of life are much higher.

“China’s urbanization rate is only 65 pet cent. If calculated at 80 per cent in the future, it means that another 200 to 300 million people will enter urban areas, which will generate a huge increase in the real economy,” he said.

Productivity has ‘disappeared’

Other economists, however, believe that the issues that sparked the Peak China narrative were likely building for several years.

“The Chinese economy grew so fast in the early 2000s because of high productivity,” Loren Brandt, Noranda Chair Professor of Economics at the University of Toronto, told DW, adding that productivity was responsible for about 70 per cent of GDP growth during China’s first three decades of reform initiated in 1978.

“After the financial crisis, productivity growth just disappeared. It’s now maybe one-quarter of what it was before 2008,” Brandt said.

As China’s communist party prepares to meet on July 15-18 for its most important meeting of the year, the country faces numerous short-term economic headwinds.

China’s total debts have widened to more than 300 per cent of gross domestic product (GDP) — a large chunk is owned by local governments. Foreign direct investment has fallen for 12 months in a row, dropping 28.2 per cent in the first five months of 2024 alone. Despite huge investments to ramp up production of new technologies, some of Beijing’s trade partners are restricting Chinese imports.

“Here is an economy that has invested enormously in R&D [research and development], people and first-class infrastructure. But it is not being leveraged in a way that’s helping to sustain growth in the economy,” Brandt told DW.

Unintended consequences of Xi Jinping’s power grab

Beijing, under President Xi Jinping’s rule, has also moved toward more centralization of the economy through state ownership of industries. China’s leaders decided the next wave of growth would be built on the back of domestic consumption, allowing the country to be less reliant on foreign exports.

However, many social programs haven’t kept pace with China’s economic miracle. So, consumers, who can no longer rely on low-cost health care, education and more than a basic state pension, are wary of spending more of their savings. Their household wealth has dropped by up to 30% as a result of the property crash, Brandt said.

“[Decentralization] during the first two or three decades gave room for local governments to make decisions,” Brandt said. “China benefited enormously from the autonomy, freedom and incentives that they had and the enormous dynamism from the private sector. These issues are going to be much harder to reverse, especially under the current leadership.”

In the late 2000s, the private sector made up close to two-thirds of the Chinese economy, but by the first half of last year, that share had dropped to 40%. The state-run and mixed-owned sector has grown much larger.

While China now has the most firms in the Fortune Global 500 list, those companies are much less profitable than their US counterparts, averaging profit margins of 4.4 per cent compared to 11.3 per cent for US multinationals.

Is China the new Japan?

The big fear is that all these factors could see China’s economy go the way of Japan. After World War II, Japan experienced an economic miracle, marked by decades of high growth that caused a massive stock market and real estate bubble.

At its peak, Japan was predicted by some economists to overtake the US as the world’s largest economy. Then in 1992, the bubble burst, fortunes were lost and the economy went into a tailspin. Japan has since failed to make up for several decades of lost growth.

Chinese economists, meanwhile, point to the country’s industrial GDP being already twice the size of the US. Last year’s GDP growth at 5.2 per cent was more than double the US growth rate. The Asian country’s economy already surpassed the US in 2016 when measured in purchasing power parity (PPP).

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“In the past 45 years, China’s development has faced many economic problems,” Wang told DW. “But compared with the depression 30 years ago, the high debt 20 years ago, and the housing crash 10 years ago, the current problem is not the most serious,” he added, referencing previous crises.