In early 2022, many portrayed Joe Biden as a failed president. His legislative agenda appeared to have stalled, and economic difficulties appeared to guarantee devastating midterm election losses. Instead, the Anti-Inflation Act was enacted, which is primarily a weather law that completely changes the landscape, the much-vaunted “red wave.” [del Partido Republicano] it stalled in a wave and while many economists continue to predict a recession, unemployment remains low and inflation has eased.
In contrast, China’s Supreme Leader Xi Jinping continued to inflate his victory over the Covid earlier in the year. And indeed, for a time it was common to claim that China’s apparent success in managing the pandemic is a red carpet for its new role as the world’s leading power. However, now Xi has abruptly ended his zero-Covid policy, and everything points to a huge increase in hospitalizations and deaths that will strain the healthcare system to the point of collapse; it seems that the Chinese economy will face big problems in the next two or three years; and long-term forecasts for Chinese economic growth are being revised downwards.
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Apparently, the future of China is not what it used to be. Why?
China’s ability to limit the spread of the coronavirus through draconian lockdowns should demonstrate the superiority of a regime that doesn’t need to consult citizens, that can simply do what needs to be done. Meanwhile, Xi’s refusal to prepare for the takeover, along with his failure to introduce the most effective vaccines and vaccinate the most vulnerable citizens, demonstrates the weaknesses of authoritarian governments where no one can tell you who’s wrong.
Barring the prospect of impending carnage, China’s long-standing macroeconomic problems appear to be worsening.
For years it has been clear that China’s economy, despite its astounding record of growth, has been seriously unbalanced. A very small part of the improvements that this growth has brought has reached the households, so that the share of private consumption in the gross domestic product is very small. This has been offset by extremely high investment rates, but the evidence is that these investments are yielding declining returns, making companies increasingly reluctant to take on new initiatives.
Nonetheless, China has managed to maintain full employment, largely by fostering a huge housing bubble. China’s real estate sector is reaching colossal proportions. They account for 29% of GDP by one estimate, and investment in real estate as a percentage of GDP is double what it was in the United States at the height of the housing bubble in the first decade of the 21st century.
Such a situation is not sustainable. Economists often quote Stein’s law: “If something cannot go on forever, it will stop.” Exactly how China’s bubble will end is unclear; There could be a sharp slowdown, or there could be a streak of “substandard” growth that hides the true extent of the problem, but it won’t be pretty.
However, what really surprised me is the way analysts have lowered their long-term forecasts for Chinese growth.
Two caveats to that. First, no one is very good at predicting long-term growth; As MIT economist Robert Solow joked not long ago, attempts to explain disparities in national growth rates often end in a “great display of amateur sociology.”
Second, when measuring the size of 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 living tends to be relatively low.
After this last metric, the calculations suggest that China overtook the United States around 2016. But the dollar-based metric could be considered more important when it comes to geopolitical influence. So when will China take the lead?
Recently, Goldman Sachs, which previously forecast that China will be the leading economic powerhouse by the mid-2020s, pushed that date back to 2035. The Japan Center for Economic Studies, which had previously forecast Chinese leaders at 2028 and then 2033, now claims it will take several decades to manufacture. Some analysts believe this will never happen.
Why this new pessimism? Part of the problem has to do with demographics. China’s working-age population has actually been shrinking since 2015. China’s economy can still grow rapidly if it maintains strong productivity growth. But China’s policy missteps appear to reinforce the perception that it is entering the “middle-income trap,” a widely recognized (if controversial) phenomenon in which some poor nations are catching up quickly, but only to a point, and they far below the level of income stagnation in the most advanced economies.
None of this should be interpreted as undermining the tremendous rise in living standards in China over the past four decades, or to deny the fact that China has already become an economic superpower. But if they took China’s economic supremacy for granted, they may have to wait a long time. As I said, China’s future is not what it used to be.
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