[Analysis: issues of governance,
rising debt, Covid and property market turmoil will delay Beijing’s quest to
become the global economy’s No 1]
By George
Magnus
The issue though is less about the
maths and more about why China is at a turning point.
Remember we have been here before.
In the 1930s, Germany was going to dominate Europe, if not the world. In the
1960s and the 1980s, the Soviet Union – which had already stolen a march on the
US in space technology – and later Japan, which was the rising economic force
on the planet, would within 10 to 20 years overtake America to become the
dominant economic and technological power.
History was not kind to the consensus. There is a serial tendency going back to
the 1920s to underestimate the self-rectifying capacity of American institutions
and enterprise. Equally, the Soviet Union and Japan both pursued similar
development models, based around distortions that emphasised unsustainably and
excessively high savings, high investment, and eventually high debt. Their
development models cracked with spectacular consequences attributable to
chronic failures of institutions and governance.
China is our 21st-century version of this phenomenon. Its investment rate is a
good 10 percentage points of GDP higher than it was at the peak in the USSR and
Japan, and strongly associated with misallocation and inefficiency of capital,
and widespread debt servicing problems.
Its zero-Covid policy could keep barriers in place between China and the world
economy until 2023 or even beyond, but this aside, a protracted slowing in
trend growth, exacerbated by over-indebtedness and the
tipping point now in real estate, as
illustrated by the crumbling development giant Evergrande, is already under
way. China’s $60tn real estate sector is four times GDP and accounts for a
quarter to a third of annual growth. It faces years of awkward adjustment, not
least as developers cut debt, the first-time buyer age cohort contracts, and
probably as real estate prices decline.
China’s economic structure, moreover, is unbalanced. It has 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, little higher than
it was in 2010, and much lower than in 2000. Productivity growth, closely
associated with liberalising 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 recognise that change is necessary, and Xi
Jinping recently revived the slogan of “common prosperity” to mobilise 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 liberalising, 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.
