China Will Struggle to Become a Dominant Economy: Think Tank

China will never have a “meaningful lead” over the U.S. and will remain “far less prosperous” and productive per person, even by the mid-century, a Sydney-based think tank has said. In its new analysis paper, “Revising Down the Rise of China,” the Lowy Institute said it believes that China’s economic growth will slow to an average of 2 to 3 percent overall from now until 2050, according to the projections. Report co-author and Lowy lead economist Roland Rajah said China was facing several significant constraints to its economy, including demographic challenges, declining housing and public investment, and slowing productivity. Rajah noted that among 20 recent studies, most suggest that China’s economic growth could average out at around 5 percent a year until 2030 before falling to around 4 percent until 2050. “Expectations regarding the rise of China should be substantially revised down compared to most existing economic studies and especially the expectations of those assessing the broader implications of China’s rise for global politics,” he said. As actual data from China is unobtainable, the analysis is based on the latest medium-term projections from the IMF and long-term forecasts published by the OECD in 2018. Economists are often skeptical of official data published from the Chinese Communist Party. For example, some experts find its GDP figures to be overestimated and thus unreliable (pdf). Demographics The most straightforward contributor to the decline in China’s long-term economic growth is its demographics. After 37 years of the communist regime’s draconian one-child policy, China’s working-age population is continuing to shrink dramatically. China’s latest national census shows that over the past decade, the fertility rate fell to 1.3 births per woman in 2020, well below the replacement rate. “[United Nations projections] suggest that by 2050, China’s working age population will have shrunk by roughly 220 million people—about one-fifth of its current level,” Rajah said. A woman holds a baby at a park in Beijing, China on May 12, 2021. (Kevin Frayer/Getty Images) Further, China has a limited ability to offset this demographic outlook. While Western developed nations typically use immigration to compensate for low fertility rates, China is not a popular choice for migrants. In fact, China’s net migration is negative, with more native citizens looking to move overseas than people entering. Housing Market As the population ages and declines, the need for housing also decreases. As a result, China’s housing market also faces decline. “The Chinese housing market [is] already going through a difficult regulatory-driven financial shake out following decades of rapid growth and investment,” Rajah said. Over the past couple of decades, China’s housing market has boomed, with housing investment estimated to have surged to 14 percent of GDP or half of all private fixed investment. “Concerns about oversupply, excessive leverage, speculative investment, and rapid price increases are longstanding,” Rajah said. “China’s policymakers have recently begun to rein in the housing market more decisively as a result.” The recent collapse of China’s Evergrande Group, which held liabilities amounting to 3 percent of China’s GDP, was the first “major casualty” of Beijing’s tighter housing policies. Rajah noted that many other property development companies appear “financially vulnerable” while market conditions will likely become more difficult. One fundamental issue is the deceleration of urban population growth, which implies a “dramatic decline” in urban housing construction. Another factor is that around 90 percent of registered urban households reportedly own at least one property. Weakening economic growth would also reduce employment opportunities and provide less incentive for rural to urban migration. This lowering demand combined with longstanding oversupply issues leaves the outlook of the sector even more negative. The company logo is seen on the headquarters of China Evergrande Group in Shenzhen, Guangdong province, China, on Sept. 26, 2021. (Aly Song/Reuters) Productivity As China faces a dramatic decline in its working age population, attention has shifted to increasing productivity which has continued to decline according to estimates. “The key question however is: what pace of productivity performance can China realistically achieve?” Rajah said. Historically, China has never had impressive productivity. It’s “strong productivity” performance was more of a reflection of it’s “incredibly low starting point,” Rajah noted. When comparing the Chinese economy to similar stages of development in the Four Asian Tiger economies, productivity growth in China to date has underperformed by a “sizeable margin.” “Whereas the previous East Asian miracle economies benefitted substantially from relatively unfettered access to Western markets and technologies, geopolitics means China c

China Will Struggle to Become a Dominant Economy: Think Tank

China will never have a “meaningful lead” over the U.S. and will remain “far less prosperous” and productive per person, even by the mid-century, a Sydney-based think tank has said.

In its new analysis paper, “Revising Down the Rise of China,” the Lowy Institute said it believes that China’s economic growth will slow to an average of 2 to 3 percent overall from now until 2050, according to the projections.

Report co-author and Lowy lead economist Roland Rajah said China was facing several significant constraints to its economy, including demographic challenges, declining housing and public investment, and slowing productivity.

Rajah noted that among 20 recent studies, most suggest that China’s economic growth could average out at around 5 percent a year until 2030 before falling to around 4 percent until 2050.

“Expectations regarding the rise of China should be substantially revised down compared to most existing economic studies and especially the expectations of those assessing the broader implications of China’s rise for global politics,” he said.

As actual data from China is unobtainable, the analysis is based on the latest medium-term projections from the IMF and long-term forecasts published by the OECD in 2018.

Economists are often skeptical of official data published from the Chinese Communist Party. For example, some experts find its GDP figures to be overestimated and thus unreliable (pdf).

Demographics

The most straightforward contributor to the decline in China’s long-term economic growth is its demographics.

After 37 years of the communist regime’s draconian one-child policy, China’s working-age population is continuing to shrink dramatically.

China’s latest national census shows that over the past decade, the fertility rate fell to 1.3 births per woman in 2020, well below the replacement rate.

“[United Nations projections] suggest that by 2050, China’s working age population will have shrunk by roughly 220 million people—about one-fifth of its current level,” Rajah said.

Epoch Times Photo
A woman holds a baby at a park in Beijing, China on May 12, 2021. (Kevin Frayer/Getty Images)

Further, China has a limited ability to offset this demographic outlook. While Western developed nations typically use immigration to compensate for low fertility rates, China is not a popular choice for migrants.

In fact, China’s net migration is negative, with more native citizens looking to move overseas than people entering.

Housing Market

As the population ages and declines, the need for housing also decreases. As a result, China’s housing market also faces decline.

“The Chinese housing market [is] already going through a difficult regulatory-driven financial shake out following decades of rapid growth and investment,” Rajah said.

Over the past couple of decades, China’s housing market has boomed, with housing investment estimated to have surged to 14 percent of GDP or half of all private fixed investment.

“Concerns about oversupply, excessive leverage, speculative investment, and rapid price increases are longstanding,” Rajah said. “China’s policymakers have recently begun to rein in the housing market more decisively as a result.”

The recent collapse of China’s Evergrande Group, which held liabilities amounting to 3 percent of China’s GDP, was the first “major casualty” of Beijing’s tighter housing policies.

Rajah noted that many other property development companies appear “financially vulnerable” while market conditions will likely become more difficult.

One fundamental issue is the deceleration of urban population growth, which implies a “dramatic decline” in urban housing construction.

Another factor is that around 90 percent of registered urban households reportedly own at least one property. Weakening economic growth would also reduce employment opportunities and provide less incentive for rural to urban migration.

This lowering demand combined with longstanding oversupply issues leaves the outlook of the sector even more negative.

China Evergrande Group in Shenzhen
The company logo is seen on the headquarters of China Evergrande Group in Shenzhen, Guangdong province, China, on Sept. 26, 2021. (Aly Song/Reuters)

Productivity

As China faces a dramatic decline in its working age population, attention has shifted to increasing productivity which has continued to decline according to estimates.

“The key question however is: what pace of productivity performance can China realistically achieve?” Rajah said.

Historically, China has never had impressive productivity. It’s “strong productivity” performance was more of a reflection of it’s “incredibly low starting point,” Rajah noted.

When comparing the Chinese economy to similar stages of development in the Four Asian Tiger economies, productivity growth in China to date has underperformed by a “sizeable margin.”

“Whereas the previous East Asian miracle economies benefitted substantially from relatively unfettered access to Western markets and technologies, geopolitics means China can no longer do so and instead faces the prospect of intensifying ‘decoupling’ with the United States and potentially other advanced Western economies,” Rajah said.

Economic Dependency on China

China has been Australia’s biggest trading partner since it overtook Japan in 2007 and has relied on its planned economy for the last couple of decades.

Continued reliance on a declining Chinese economy would likely not be sustainable for the future growth of Australian businesses.

The communist regime’s politically motivated trade war, launched in mid-2020, has encouraged businesses to diversify elsewhere.

The Lithuanian Foreign Minister, Gabrielius Landsbergis, recently told Australians that while breaking dependency from Beijing and Moscow would cause the cost of goods to go up, it was a price that the world needed to pay to safeguard the rules-based order.

“For decades now, there were those who were convinced it is possible through the liberalisation of trade to bring values like rule of law and democracy to others,” Landsbergis told the National Press Club on Feb. 10. “Unfortunately, it doesn’t seem to be the case—quite the opposite actually.”

“It appears that profitability created dependencies, dependencies that limit the possibility of one side to even ask for responsibility from the other,” he said.


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Rebecca Zhu is based in Sydney. She focuses on the Australian economy, property, and education. Got a tip? Contact her at [email protected]