“The east is rising, the west is declining”, according to the narrative propagated by the Chinese Communist Party (CCP). Many outside China takes its “inevitable rise” as read. On the way to becoming a “modern socialist country” by 2035, and rich, powerful, and dominant by 2049, the centenary of the People’s Republic, China wants to claim bragging rights as its GDP surpasses the United States, and project its power based on its expanding economic heft.
There is, however, a critical flaw in this narrative. China’s economy may fail to overtake the US as it succumbs to the proverbial middle-income trap. This is where the relative development progress of countries in relation to richer nations stalls, and is normally characterized by difficult economic adjustment and often by unpredictable political consequences.
Historically, China’s growth miracle has been remarkable. In the 30 years to 1990, the money GDP (the market value of goods and services produced in an economy) for China and the US in American dollar terms grew more or less in tandem at just over 6% and 8% per annum, respectively. . But in the next three decades, China’s GDP growth doubled to more than 13%, while America’s halved to 4.5%. That pushed China’s GDP up from 5% of American GDP to 66%.
Yet, China’s growth spurt is now over, and the huge disparity in GDP growth has been eliminated. In the last few quarters, China’s GDP has been growing at half the rate of the US. Although that discrepancy is probably unsustainable, America’s estimated $7tn GDP margin over China in 2021 means that comparable rates of GDP growth in the future will sustain and even widen the margin. A Japanese think tank has recently extended the date when it expects China to overtake the US, from 2029 to 2033. Deferrals like this are now a feature, and there will be more.
China’s economic structure, moreover, is unbalanced. It has an income per head that is the equivalent of Mexico, but consumption per head that is no higher than Peru. Consumer spending accounts for about 37% of GDP, a little higher than it was in 2010, and much lower than in 2000. Productivity growth, closely associated with liberalizing reform, has stalled.
China’s development model urgently needs a makeover to avoid the middle-income trap. The longer it is delayed, the bigger the costs. China’s leaders recognize that change is necessary, and Xi Jinping recently revived the slogan of “common prosperity” to mobilize the Communist party and citizens around a strategy to reduce income and regional inequality, and improve living standards.
Yet these political goals require precisely the kind of liberalizing, progressive and redistributive reforms to the economy to which Xi Jinping is opposed. He has pursued an increasingly ideological and totalitarian governance style in which the already dominant position of the party and state in the economy has been strengthened further.
Perversely, he has created a contradiction in which even the CCP’s expertise in dialectical argument may be of little help. The recent blizzard of new laws and regulations aimed at private firms and entrepreneurs, for example, is designed to nail down the party’s control and bring the private sector to political heel. This is hardly compatible with the productivity growth and innovation on which China’s lofty economic ambition depends.
Overtaking the United States is going to need a lot more than narrative. It requires policies to which Xi’s China is opposed, and might just remain a mirage. The consequences for China and the rest of the world have not been properly thought about.
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