Will China ever get rich? A new era of much slower growth dawns

BEIJING - China is entering an era of

much slower economic growth,

raising a daunting prospect: It may never get rich.

Whether the world’s second-largest economy chugs ahead at 3 per cent to 4 per cent annually or flirts, as some economists expect, with Japan-like “lost decades” of stagnation, it looks set to disappoint its leaders, its youth, and much of the world.

“It is unlikely that the Chinese economy will surpass that of the United States within the next decade or two,” said Dr Desmond Lachman, a senior fellow at the American Enterprise Institute.

He expects growth to slow to 3 per cent, which “will feel like an economic recession” when youth unemployment is already above 20 per cent.

Dr Lachman added that “this is not good for the rest of the world economy” either.

When Japan began to stagnate in the 1990s, it had already exceeded the average gross domestic product per capita of high-income economies and was nearing US levels.

China, however, is only just above the middle-income point.

Second-quarter growth of 6.3 per cent underwhelmed, considering the low base caused by 2022’s Covid-19 lockdowns, raising pressure on Chinese leaders who are expected to meet in July to discuss a short-term boost and longer-term fixes.

The April-June data puts 2023 growth on track for roughly 5 per cent, with slower rates thereafter.

But China’s annual growth averaged around 7 per cent in the last decade, and more than 10 per cent in the 2000s.

Prompted by such a loss in momentum, economists no longer ascribe

weak household consumption and private sector investment

to the pandemic’s effects, blaming structural ills instead.

These include the burst of a bubble in the property sector, which accounts for a quarter of output; one of the deepest imbalances between investment and consumption; a mountain of local government debt; and the Communist Party’s tight grip over society, including private businesses.

China’s workforce and consumer base are also shrinking, while the cohort of retirees is expanding.

“The demographic problem, hard landing of the property sector, heavy local government debt burden, pessimism of the private sector as well as China-US tensions do not allow us to hold an optimistic view towards mid- to long-term growth,” said Huatai Asset Management chief economist Wang Jun.

Ways out

China’s National Development and Reform Commission (NDRC) head Zheng Shanjie, in a July 4 article in the official Qiushi magazine, made a rare reference to the middle-income trap, saying that China needed to “accelerate the construction of a modern industrial system” to avoid it.

Mr Zheng was referring to developing nations’ struggle to transition from mid- to high-income levels due to rising costs and declining competitiveness.

Economists cite China’s

electric vehicle boom

as evidence of progress, but much of its industrial complex is not upgrading at the same speed. Overseas car sales account for only 1.7 per cent of exports.

“Many observers will look at some of the companies and say, wow, China can come up with all these fantastic products, so the future should be bright. My question is: Do we have enough of those companies?“ said Nomura Research Institute chief economist Richard Koo.

Policymakers have said they want household consumption to drive growth, without hinting at concrete steps.

Fathom Consulting China economist Juan Orts said boosting consumer demand might redirect resources away from supporting manufacturing exporters, which partly explains hesitance towards such reforms.

Rather, China took steps the other way.

President Xi Jinping’s “common prosperity” drive against inequality

has encouraged salary reductions in finance and other sectors. Deteriorating city finances prompted pay cuts for civil servants, feeding a deflationary spiral.

Ms Zhao, a manager at a Beijing-based bank, feels she will never get rich, her salary remaining unchanged through several promotions.

Instead of working hard, she said, she plans to retire in her 40s to a smaller, cheaper city.

Many economists have called for better public healthcare, higher pensions and unemployment benefits, and other building blocks for a social safety net to give consumers confidence to save less.

Central bank adviser Cai Fang in July called for consumption stimulus, including changes to China’s residence permits, or hukou, which deny public services to millions of rural migrants in the cities they work in.

Shanghai Advanced Institute of Finance deputy dean Zhu Ning said improving social welfare could make growth rates of 3 per cent to 4 per cent more sustainable.

‘Last chance’

Nomura’s Mr Koo said China’s problems are more challenging than Japan’s a generation ago, giving policymakers room for error should they seize the “last chance” to reach developed-world living standards.

China, in his assessment, has a “balance sheet recession”, with consumers and businesses repaying debt instead of borrowing and investing.

This, he said, is how depressions start, and the only cure is “speedy, substantial and sustained” fiscal stimulus, which he did however not see as forthcoming, given China’s debt concerns.

Beyond that, he said stimulus must be productive, and complemented by changes that allow the private sector to emerge from under the shadow of the state, including through better relations with source countries of foreign investment.

But China would need to reverse course.

Infrastructure investment in recent years has generated more debt than growth.

As major economies try to reduce dependence on China, Beijing remains locked in tit-for-tat trade battles,

the latest over metals used in semiconductors.

“Every time the US announces some anti-China policy, the Chinese government comes up with an equivalent one. But the Americans are not in the middle-income trap. China is,” Mr Koo said.

“If Chinese people do not reach their Chinese dreams, perhaps you will have 1.4 billion not very happy people over there, which might be rather destabilising.” REUTERS