Written by Max Leshne
Until a couple of years ago, very few people foresaw a drastic slowdown in the Chinese economy. In fact, most economists believed it was destiny that China would overtake the U.S. as the world’s largest economy in the next decade. This sentiment has changed. China’s once rosy economic future has become clouded. With the United States and China locked in a global competition that some have dubbed a “second Cold War,” China’s economic trajectory has massive implications for the future of this conflict. Will China continue on its path of dominant economic growth, as has been characteristic of the past several decades, or will its economic growth rapidly slow, hindering its ability to project influence abroad? There is perhaps no question more pressing in the minds of both American and Chinese policymakers.
The Chinese Communist Party (CCP) discovered the most effective economic model in the world, capable of sustaining high growth rates over long periods of time—or so it seemed. The Chinese economic model is called a socialist market economy, and it is characterized by state and privately owned businesses (Asialink Business). Further, the Chinese government regulates the economy strictly, much more than what is seen in the United States and European Union. In the early 2000s, China’s average GDP growth rate was around 10% per year (MacroTrends). In the 2010s, this number was about 7% (MacroTrends). These numbers are mind-boggling, especially when compared to the United States, which aims for GDP growth between 2-3% per year. However, it is not uncommon for emerging economies to post high levels of GDP growth. What made China different? China was achieving these high levels of GDP growth even as it passed the early economic development stages. These high levels of growth seemed to validate the Chinese economic model as a viable system and allowed China to challenge the U.S.’ hegemony.
So what’s changed? Why are people questioning the Chinese economic model now? There have been several developments over the past few years that have altered experts’ previously held opinions. One of these developments is President Xi Jinping’s “Zero COVID” strategy. When COVID ravaged the world in early 2020 and most countries locked down, many individuals praised China’s success in stopping the virus’ spread. While lockdowns and self quarantines were difficult to enforce in countries like the U.S., quarantine regulations were strictly obeyed in China. However, as the rest of the world slowly returned to normal market activity in 2021 and 2022, China continued to intermittently shut down parts of its country (and economy) to stop the spread of the virus. Xi Jinping has made this “Zero COVID” strategy a national priority. Thus, any new cases of COVID-19 are met with swift lockdowns and economic turmoil in the areas of the country where new cases are found.
Businesses around the world were hopeful that after President Xi was elected for a third term he would relax his Zero COVID policy, but he has shown little willingness to do so. His Zero COVID strategy is a danger to China for two main reasons. First, it has completely changed the calculus for China’s long-term growth. The repeated shutdowns have damaged the economy and lowered growth estimates for this year and future years. Second, the Zero COVID strategy relates to larger concerns about China’s economic model of mixing a state-run system with private enterprise. Given the outcome of President Xi’s Zero COVID policy, many worry that the Chinese government can completely change the country’s economic course spontaneously. Investors seek out governments committed to economic stability and long-term growth; the Zero COVID policy has threatened to upend both of these aims.
There are other reasons to be pessimistic about China’s prospects for economic growth in the short term. Throughout 2022, China’s property market has been in turmoil. While this might seem like a minor issue, the property market makes up about a third of GDP in China (BBC News). If the property market is unstable, the Chinese economy is too. An unstable property market could lead to extremely poor outcomes for China in the future.
Although China’s short-term problems certainly raise concern, its long-term trends pose greater threats to the country’s economic prowess. First, there’s reason to believe that China’s model of forceful state intervention is harming growth prospects, as crackdowns on private companies have negative economic consequences. Under President Xi, state-owned companies are greatly favored over privately-owned companies. Actions by the government have harmed growth in the private sector and this will most likely continue under President Xi. Second, increasing competition with the U.S. will put more pressure on China’s economy. Recently, President Biden announced new export controls that ban the sale of certain types of semiconductors to China and the machinery needed to make these semiconductors (Yahoo). Such actions will drastically harm China’s semiconductor industry. Because semiconductors are an integral part of the modern economy, China’s economy as a whole will be hurt (Foreign Policy). Third, there’s reason to believe that China’s economic growth will slow as a result of demographic trends—similar to Japan in the 1990s and 2000s. In the 1960s, Japan grew around an average of 10% per year, similar to China in the early 2000s (MacroTrends). The annual growth rate fell to 4-5% by the 1970s and 1980s and to 1-2% by the 1990s and into the 2000s (MacroTrends). A major reason for this stagnation was unfavorable demographic trends (an aging workforce), something that China is beginning to experience now. Will China’s growth prospects mirror what happened to Japan? Demographic trends certainly seem to indicate as much. According to Capital Economics, an economics research company, China’s economy may surpass the United States’ in size in the 2030s, only to fall behind later as unfavorable demographic trends manifest (The Economist).
The future of the world is tied to China’s economic growth. A stagnating China could lead to consequential outcomes on various fronts. First, it would mean the world as a whole would be worse off, as China is a crucial part of the global economy. Second, an economically weakening China could attempt to exert more influence in its region. Many people believe that if China’s economic prospects don’t brighten in the next few years, it could attempt to take Taiwan by force. Why would China do this if it is becoming weaker economically? China’s leaders, understanding that their country’s power is peaking, could choose to make a move on Taiwan sooner rather than later. This is a fear that many people have, a fear that could be realized soon. Third, if China’s economy stagnates, this would be a major blow to the ideology of capitalism with forceful state controls, which China has championed. China’s leaders have claimed that this economic system avoids what traditional capitalism excels at: the boom and bust cycle. But if China’s economy falls victim to this cycle and stagnates, claims that the Chinese economic system is superior will be seen as hollow. With all of these things considered, the next few years will be monumental for the future of the Chinese economy. Will it go back to growing at its pre-COVID rates? Or will its intrusive state controls, unfavorable demographics trends, and competition with the United States doom China to a future of low growth rates? The outcome will likely have drastic consequences on the world.
Sources
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Iyengar, Rishi. “Biden Short-Circuits China.” Foreign Policy, 28 Oct. 2022,
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2022, https://finance.yahoo.com/news/the-real-trade-war-with-china-has-begun-173731598.html.
Tewari, Suranjana. “Five Reasons Why China’s Economy Is in Trouble.” BBC News, BBC, 4
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26 Sept. 2022, https://www.economist.com/the-economist-explains/2022/09/06/will-chinas-economy-ever-overtake-americas.