Has China’s economy peaked?

SHANGHAI — The narrative that China’s economy is nearing its peak — or has already reached it — has taken hold in Western media. But if you read the doomsayers’ analyses carefully, you will find that many of the reasons they give for their bleak assessments are not new. On the contrary, they tend to highlight precisely the same challenges that economists and commentators have been harping on for at least a decade or longer. If China was not sputtering then, why should we believe it is now?

To be sure, the global context has changed. Perhaps most important, the prevailing narrative about China has turned largely negative, and the West is now far more hostile towards it than it was ten or even five years ago. With the United States working harder than ever to contain China, direct Chinese exports to the US have fallen.

Even so, the “decoupling” of the world’s two largest economies is probably overstated. A recent study by University of California San Diego economist Caroline Freund and her colleagues shows that the US and China are indeed reducing their engagement in some areas. For example, US import growth from China lagged well behind US import growth from other countries for products subject to US tariffs.

But the same study also found that US and Chinese supply chains remain deeply intertwined, especially for “strategic products”. Moreover, the countries from which US imports are growing are often deeply — and increasingly — embedded in Chinese supply chains. In fact, countries seeking to displace China in US supply chains have been increasing their own imports from China, especially in strategic industries.

At the same time, global firms appear to be pursuing a “China+1” strategy, investing in other countries in addition to — but not instead of — China. Chinese companies, for their part, have increased their foreign direct investment in recent years and deployed their own production chains far beyond China’s borders, especially to countries that can avoid punitive US tariffs. This trend is likely to persist, ensuring that Chinese capital continues to flow to the rest of the world.

The doomsayers would likely point out that China is also facing domestic challenges. Beyond unfavourable demographics, China is also grappling with issues like large debts, misallocation of capital, severe pollution and a troubled property sector. But China’s government has been clearly aware of these problems — and committed to addressing them — for a decade.

China’s programme of “supply-side structural reform”, for instance, took shape in 2015 and included tighter financial regulations and increased government supervision of — and intervention in — highly leveraged sectors with excess production capacity. While the programme helped to prevent a debt or financial crisis, it also constrained growth in many highly leveraged industries, such as real estate. But the view that a sluggish property sector will trigger China’s economic collapse is overly dramatic.

Chinese policymakers understand that a transition is inevitable in the real-estate sector, and are committed to ensuring that it occurs smoothly. More broadly, the structural reforms that have already been implemented have boosted China’s economic resilience, and, despite US tariffs, Chinese exports have remained robust. Meanwhile, new sectors — from services to the digital economy and high-tech industries — have been growing fast.

All of this helps to explain why China achieved 6.6 per cent three-year-average growth in 2017-19. While the COVID-19 pandemic slashed growth in 2020, the economy rebounded strongly in 2021, growing at a rate of 8.1 per cent. And the growth rate in 2023 is most likely to be slightly over 5 per cent; even a round of lockdowns in 2022 did not prevent growth.

This does not mean that China emerged from the pandemic unscathed. Three years of reduced opportunities to generate income limited Chinese consumers’ ability to fuel a rapid post-pandemic recovery. The government must now redouble its efforts to support domestic demand and job creation by pursuing more expansionary monetary and fiscal policies over the next two years.

Chinese policymakers must also work to accelerate the liberalisation of some industries. For example, productive services where private and foreign capital is barred from entering must be freed of these restrictions as soon as possible. Fortunately, there are signs that the authorities are aware of this imperative: financial regulators just granted a bank-card-clearing licence to the US firm Mastercard. China also unilaterally introduced visa-free entry for six countries — including France, Germany, and Italy — last month.

Nobody expected China to sustain double-digit growth forever. Capital accumulation was always going to slow, and the early dividend generated from structural drivers of growth were always going to weaken. Now, economic growth will require higher shares of spending on household consumption, rather than on investment.

That is why China’s government is expected urgently to reduce the share of investment in GDP and support household consumption, such as through income transfers and stronger welfare programmes (which would enable households to reduce precautionary savings). This will create a prosperous domestic market, encourage the expansion of the service industry, and support the shift to sustainable growth.

China’s economy has not exhausted its development potential, nor has it matured to the point that it has lost its vitality. While the economy’s current status has made rebalancing possible, it also opens a time window for China’s leadership to commit to carrying out structural reform. Certainly, growth has been slowing down and the global context has changed, creating a sense of urgency. But this is likely to work in the country’s favour, accelerating the structural reforms that its emerging growth model needs.

Zhang Jun, dean of the School of Economics at Fudan University, is director of the China Centre for Economic Studies, a Shanghai-based think tank.