China and its self-inflicted economic woes

China and its self-inflicted economic woes

At their recent summit in San Francisco, US President Joe Biden and Chinese President Xi Jinping made progress in a few key areas. Notably, they agreed to resume direct military-to-military communications in order to reduce the chances of accidental conflict. But neither leader was negotiating from a particularly strong position: as Mr Biden struggles with low approval ratings, Mr Xi is overseeing a rapidly weakening economy.

The economic news out of China has been poor for some time. Growth is slowing; the population is declining; the property sector is facing huge losses; banks are grappling with non-performing loans; and foreign investment is falling. China is facing a long period of stagnation similar to the one from which Japan has only recently emerged.

Like China, Japan benefited from a prolonged period of robust economic performance -- GDP growth in the 1950s and 1960s averaged 9-10% -- before slowing to 5-6% growth in the 1970s and 1980s. This is not hard to explain. As incomes per capita catch up to those in advanced economies, the increase in per capita income becomes more difficult to sustain, and GDP growth slows. This pattern -- known as "growth convergence" -- can also be observed in Hong Kong, Singapore, South Korea, and Taiwan.

This slowdown in income growth per capita may occur before an economy has reached high-income status. It may emerge at middle-income levels, so that countries become ensnared in the so-called middle-income trap. China -- which until a decade ago was on track to reach high-income status -- may well be falling into this pattern.

The decline in China's working-age population makes this all the more likely. In Japan, a shrinking labour force is dragging down total growth by about one percentage point: the potential per capita growth rate remains in the 1.5-2% range, but the overall potential growth rate is estimated to be less than 1%. With China facing similarly unfavourable demographic trends -- the legacy of decades of strict family-planning policies -- the government has been forced to lower its growth target to 5%.

The Chinese property sector's travails also echo Japan's experience. In the second half of the 1980s, Japanese stock prices tripled, and land prices quadrupled, inflating an asset-price bubble that would collapse in the 1990s. So far, China's real-estate booms -- of which there have been a few in the last two decades -- have not led to a bust, with prices instead plateauing at very high levels. But this time might be different.

For starters, China's real-estate boom has already engulfed third- and fourth-tier cities -- a foreboding sign. Moreover, unlike in Japan, Chinese developers have built a huge number of units that stand empty. According to China's National Bureau of Statistics, the combined floor area of unsold homes in the country amounted to 648 million square metres.

But perhaps the greatest threat to China's economic growth and development is Mr Xi himself. Mr Xi has spent the last few years tightening government control over all aspects of life in the country, including the economy. The regulatory crackdown on large tech companies like Alibaba is a case in point.

Though regulators have since backed off somewhat, and China's government is actively supporting high-tech industries like electric vehicles, Mr Xi's obsession with control continues to pose a serious threat to China's prospects. Not only does it hamper innovation by domestic firms; it also discourages foreign investment.

Already, foreign companies, such as the polling and consultancy group Gallup, are fleeing the country. This can be partly explained by China's economic slowdown, which has reduced the availability of high-return investment opportunities and, together with demographic trends, promises to shrink the Chinese market over time.

In fact, foreign companies worry about becoming the target of spurious antitrust investigations, and fear that the newly expanded, but deliberately vague counter-espionage law could result in them being punished for normal business activities. Of course, US curbs on high-tech exports to and investment in China are not helping matters.

China today shares many features with Japan in the 1980s. But the biggest risks to its economic prospects are all homegrown. By prioritising security and stability -- through surveillance, control, and coercion -- over economic dynamism, China's leaders are abandoning some of the policies and principles that underpinned the country's "economic miracle". Unless they change course, the entire global economy will suffer. ©2023 Project Syndicate


Takatoshi Ito, a former Japanese deputy vice minister of finance, is a professor at the School of International and Public Affairs at Columbia University and a senior professor at the National Graduate Institute for Policy Studies in Tokyo.

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