The End of the Rise of China?

Are we past Peak China?

Photo by NII on Unsplash

Late August is a time when many of you go on vacation, intent on reading for pleasure rather than, say, keeping up on current events. For those vacation-goers reading this, thanks for even bothering to skim this particular newsletter — aren’t you sweet!! Go take a nap on the beach or something!

Wake up from your nap? Wonder what you’ve missed? Apparently, China is facing some serious economic headwinds. Seriously, it’s been impossible to go 24 hours this month without reading a piece noting China’s economic woes.

Don’t believe me? Here’s a recent sampling. From the Wall Street Journal’s Lingling Wei and Stella Yifan Xie on August 20th:

Economists now believe China is entering an era of much slower growth, made worse by unfavorable demographics and a widening divide with the U.S. and its allies, which is jeopardizing foreign investment and trade. Rather than just a period of economic weakness, this could be the dimming of a long era.

“We’re witnessing a gearshift in what has been the most dramatic trajectory in economic history,” said Adam Tooze, a Columbia University history professor who specializes in economic crises.  

What will the future look like? The International Monetary Fund puts China’s GDP growth at below 4% in the coming years, less than half of its tally for most of the past four decades. Capital Economics, a London-based research firm, figures China’s trend growth has slowed to 3% from 5% in 2019, and will fall to around 2% in 2030.

Then there’s Bloomberg’s Rebecca Choong Wilkins and Colum Murphy, also on August 20th:

Beijing estimates what it calls the “new economy” — its name for those green manufacturing sectors, plus other hi-tech areas like microchips — grew 6.5% on-year in the first half and accounted for a little more than 17% of GDP. By contrast, real estate construction spending slumped almost 8% in the first half and the property sector provides about 20% of GDP when related industries are thrown in….

It’s not just the property companies and related industries — construction, steel, cement, glass — that are feeling the impact of real-estate sales falling some 50% below their peak levels in 2020. The contraction has also hammered household confidence. Home values are dropping, and in all likelihood much more than the modest, single-digit figures in official data. That’s a major risk when real estate accounts for as much as 70% of China’s household wealth, along with 40% of collateral held by the banks, according to estimates from Citigroup Inc.

The hit to wealth is leaving households feeling poorer, reducing their consumption appetite, in a second blow to growth. And as companies lower their expectations for profits and scale back investment and hiring plans, the impact mushrooms. Cities have been warning about an excess of gig-economy private taxi drivers, in a sure sign of weak labor demand.

China has responded to some of the economic slowdown indicators by… halting publication of the indicators. This understandably worries the Washington Post’s Catherine Rampell — also on August 20th:

Right now, the Chinese government presumably hopes that obscuring the full extent of its challenges will preserve confidence among the Chinese public and reassure any foreign investors feeling uneasy about the country’s future.

In reality, the opposite is likely true. Hiding data not only implies something very worrisome about near-term economic conditions (that Goolsbee rule). It also reveals something deeply broken and dysfunctional about the country’s governance and ability to communicate credibly when things go wrong. This may further grind down confidence and scare off investors, for much longer than any cyclical slowdown would otherwise last.

The Economist has also weighed in, noting in its cover story this week (published August 24th) that, “Even level-headed observers are shaken. The mood is the worst it has been for years, if not decades…. To break this cycle, the country’s confidence must be revived.” The problem, as they explain in their leader, is that China’s leadership is unlikely to be able to provide any confidence without more competence.

In some ways Japanification is too mild a diagnosis of China’s ills. A chronic shortfall in growth would be worse in China because its people are poorer. Japan’s living standards were about 60% of America’s by 1990; China’s today are less than 20%. And, unlike Japan, China is also suffering from something more profound than weak demand and heavy debt. Many of its challenges stem from broader failures of its economic policymaking—which are getting worse as President Xi Jinping centralises power….

Mounting policy failures therefore look less like a new, self-sacrificing focus on national security, than plain bad decision-making. They have coincided with Mr Xi’s centralisation of power and his replacement of technocrats with loyalists in top jobs. China used to tolerate debate about its economy, but today it cajoles analysts into fake optimism. Recently it has stopped publishing unflattering data on youth unemployment and consumer confidence. The top ranks of government still contain plenty of talent, but it is naive to expect a bureaucracy to produce rational analysis or inventive ideas when the message from the top is that loyalty matters above all. Instead, decisions are increasingly governed by an ideology that fuses a left-wing suspicion of rich entrepreneurs with a right-wing reluctance to hand money to the idle poor.

The fact that China’s problems start at the top means they will persist. They may even worsen, as clumsy policymakers confront the economy’s mounting challenges.

And on August 22, Ian Johnson¹ published his latest in Foreign Affairs entitled “Xi’s Age of Stagnation.” The title kinda says it all. Johnson concludes that none of this economic malaise was going anywhere anytime soon:

For more than a year, economists have argued that China is embarking on a period of slowing economic growth. To account for this, they have cited demographic changes, government debt, and lower gains in productivity, as well as a lack of market-oriented reforms. Some have talked of “peak China,” arguing that the country’s economic trajectory has already or will soon reach its apex and may never significantly overtake that of the United States. The implication is often that if only Beijing would tweak its economic management, it could mitigate the worst outcomes and avoid a more dangerous decline.

What this analysis overlooks is the extent to which these economic problems are part of a broader process of political ossification and ideological hardening. For anyone who has observed the country closely over the past few decades, it is difficult to miss the signs of a new national stasis, or what Chinese people call neijuan. Often translated as “involution,” it refers to life twisting inward without real progress…. neijuan now permeates all aspects of life in Xi’s China, leaving the country more isolated and stagnant than during any extended period since Deng launched the reform era in the late 1970s….

Over several weeks in China this spring, I spoke to a few big-picture thinkers, such as the business journal editor. But I decided to spend most of my time with a much broader cross section of Chinese people—doctors, business owners, bus drivers, carpenters, nuns, and students—whom I have known for years. Their experiences, along with broader trends in civil society and government, suggest that China’s leaders have begun to sacrifice technocratic progress and even popular support in their pursuit of stability. Beijing’s bet seems to be that in order to withstand the pressures of an uncertain world, it must turn inward and succeed on its own. In doing so, however, it may instead be repeating the mistakes of its Eastern bloc predecessors in the middle decades of the Cold War.

Again, all of this is from the last tend days in August. Go earlier in the month and you’d find Adam Posen in Foreign Affairs, Peter Goodman in the New York Times, Paul Krugman in the New York Times, Keith Bradsher in the New York Times, James Kynge in the Financial Times, and the entire editorial board of the Financial Times all saying similar stuff about the slumping Chinese economy.

That’s a lot. Are there any China optimists left out there? Well, there’s the Peterson Institute for International Economics’ Nicholas Lardy, who argues that, “[the] widely popular assessment is likely premature and, at least in part, perhaps simply wrong.” Why?

The combination of rising personal incomes and a falling saving rate means that future household consumption growth will likely surprise on the upside….

The widely noted 0.3 percent decline in consumer prices in July 2023 compared with a year ago was mostly due to elevated food prices in the same period of 2022. Stripping out volatile prices of food and energy, core consumer prices in July rose by 0.8 percent, up from the 0.4 percent increase in June. It may be premature to raise the specter of deflation based on one month of data….

The government's sudden and not well thought out crackdown on internet platform companies, which are overwhelmingly private, starting in late 2020 decimated their earnings, investment, and hiring. But in July 2023 regulators gave the all clear sign, stating that problems in the financial activities of internet companies have been "rectified." The firms, including Alibaba, ByteDance, Meituan, and others responded, stepping up their recruitment of new staff, reversing the wave of layoffs by these and other private tech firms in 2022….

To conclude, China and its people suffered greatly during the COVID pandemic, both in terms of lives lost and economic output foregone. The analysis above suggests that economic recovery may have begun. But it is fragile. Time will tell whether recovery takes hold or whether China is falling into a cyclical downward spiral.

Lardy’s word of caution is well taken. It would be difficult to believe that China’s economy will not experience a somewhat greater post-COVID bump as inventories draw down and urban consumer start to spend.

That said, even a modest increase in consumer spending cannot reverse two dominant problems plaguing the Chinese economy. First, China’s structural problems are very real and not going away anytime soon. The PRC’s demographic decline is accelerating, its productivity is continuing to stagnate, its ability to crib technology and foreign investment from others is ebbing, and its real estate sector is still a huge mess. Second, China’s leadership under Xi does not seem to be prioritizing economic growth. It is clearly emphasizing political stability and ideological fealty über alles. That does not bode well for a sustained return to healthy economic growth.

For the last two decades, American, European, and Asian commentators have been writing about China’s record-setting economic growth and sustained rise to power as an ontological given. The legacy effects of this kind of discourse can be powerful — it dominated a fair amount of the China rhetoric at the GOP debate last week. I wonder, however, if the discourse is starting to catch up to the reality that maybe, just maybe, Chinese power has peaked.

[Yeah, but this is good for the United States, right? Right?!—ed. That will be the topic of tomorrow’s column.]

1. To repeat, Ian Johnson. Not Iain Johnston. Nor Ian Johnstone. No, I can’t explain it either.