China’s future is not what it used to be

The two most powerful leaders in the world have just lived through very different years.

Early 2022Joe Biden He was considered a failed president.

His legislative agenda seemed stalled, while economic woes seemed to ensure devastating losses in the midterm elections.

What happened instead was that the Inflation Reduction Act, which is primarily a revolutionary climate bill; the vaunted “red wave” was a wave; And while many economists continue to forecast a recession, unemployment remains low and inflation is declining.

Instead, earlier this year, Xi JinpingChina’s supreme leader continued to boast of his triumph over COVID-19.

Indeed, for a time, it was common to hear claims that China’s apparent success in handling the pandemic heralded its emergence as the world’s top power.

Now, however, Xi has abruptly ended his “zero COVID” policy and all signs point to a huge increase in hospitalizations and deaths that will test the health care at breaking point; China’s economy looks set to face serious problems in the next two to three years; and China’s long-term economic growth forecasts are revised downwards.

It seems that the future of China is not what it used to be.

Why?

China’s ability to limit the spread of the coronavirus with draconian lockdowns should have demonstrated the superiority of a regime which does not need to consult the public, which can simply do what needs to be done.

However, by now, Xi’s refusal to continue preparations, his failure to adopt the most effective vaccines and to get vaccines into the arms of his most vulnerable citizens, have laid bare the weakness of authoritarian governments where no one can tell the leader when he is wrong.

Beyond the looming prospect of carnage, China’s longstanding macroeconomic woes appear to be reaching a boiling point. inflection.

It has been obvious for years that China’s economy, despite its impressive record of economic growth, is wildly out of balance.

Very few of the benefits of growth have reached households, keeping consumer spending low as a percentage of gross domestic product.

Sky-high investment rates have closed the gap, but all indications are that investment is experiencing sharply declining returns and companies are increasingly reluctant invest in new businesses.

Despite everything, China has managed to maintain full employment, but above all by fueling a huge housing bubble.

China’s real estate sector is incredibly inflated:

It accounts for 29% of GDP by one estimate, and real estate investment as a percentage of GDP is double that of the United States at the height of the 2000s bubble.

It is not a sustainable situation.

Economists often cite the Stein’s law:

“If something can’t go on forever, it will stop.”

It is unclear how exactly the Chinese bubble will end:

This could be a sharp slowdown or a period of “low quality” growth that masks the true extent of the problem, but it won’t be pleasant.

However, what really surprised me is how analysts have lowered their forecasts for long-term Chinese growth.

Two caveats.

First, nobody is very good at forecasting long-term growth; as the Massachusetts Institute of Technology economist joked Robert Solow, attempts to explain differences in national growth rates often end with a “fire of amateur sociology”.

Second, when measuring the size of national economies, one must distinguish between the dollar value of GDP and output measured at “purchasing power parity”, which is typically higher in low-income economies, where the cost of life tends to be relatively low.

On the latter measure, estimates suggest that China overtook the United States around 2016.

But the measure of the dollar is probably more important when it comes to geopolitical influence.

When will China take the lead?

Recently, Goldman Sachs, which previously predicted that China would take the top spot in the mid-2020s, pushed that date back to 2035.

The Japan Economic Research Center, which previously predicted Chinese leadership by 2028 and then 2033, now says it won’t happen for decades. Some analysts believe that will never happen.

Where does this new pessimism come from?

In part, to demographics.

China’s working-age population has been declining since 2015.

China’s economy can still grow rapidly if it can sustain rapid productivity growth.

But China’s policy blunders appear to have reinforced the perception that it is entering the “middle income trap“, a widely held (albeit controversial) phenomenon in which some poorer nations achieve rapid recovery, but only up to a point, and it is they stagnate well below the income levels of the most advanced economies.

None of this should be interpreted as a diminution of the staggering rise in Chinese living standards over the past four decades, or a denial that China has already become an economic superpower.

But if they were expecting Chinese economic dominance, they may have to wait a long time.

As I said before, the future of China is not what it used to be.