The US wishes to hobble China’s economy so it can never compete on equal terms. It is hard to interpret last week’s announcement by Washington on semiconductor export controls in any other way. The goal may be military supremacy, rather than economic, but globalisation as we knew it for the last 30 years is clearly at an end. Yet this is only the second most important event for China’s long-term growth trajectory to take place this month.
Most important of all is what will happen a few days from now, when Xi Jinping steps out at the national congress of the Chinese Communist party to acknowledge what is almost certain to be a third term as its paramount leader. In office for another five years, Xi is likely to continue China’s turn away from liberalisation and market forces, towards statism and authoritarian rule. The US may struggle to hold China’s economy down, but in this cycle of hostility, Beijing is well on the way to crippling itself.
Such shifts in the internal and external environment for Chinese growth affect the answer to the biggest economic and geopolitical question of the 21st century: can China’s rapid expansion continue until its people are as rich as Americans, or at least as rich as neighbours such as the Japanese? If so, then a simple fact comes into play. With four times the population of the US, China’s economy could grow to become four times as large, in which case it would dominate the world — certainly economically, and most likely politically and militarily as well.
The obstacles to China’s development, however, now make a different path more probable. That is a future where China still grows, and still becomes the world’s largest economy, but remains well below the income levels of the US. That would be a world of two competing superpowers. The danger is that so close a competition could be even less stable, geopolitically, than an inexorable rise to Chinese dominance.
The case for slower Chinese growth was laid out plausibly in a report by Roland Rajah and Alyssa Leng of the Lowy Institute earlier this year. With future population decline locked in by decades of the one-child policy, and diminishing returns to the construction of ever more apartments and infrastructure, China’s future growth depends on higher levels of productivity.
However, Rajah and Leng argue that China has underperformed countries such as Japan and South Korea at similar stages in their development; and that the country is struggling with the next round of reforms it needs to keep pushing productivity higher, such as developing a modern financial system that allocates capital efficiently or reforming the “hukou” system of household registration. Unlike its East Asian neighbours, Beijing must now deal with outright hostility from the US towards its attempts to move up the value chain.
It is quite possible that optimists on China’s growth are correct, that Beijing will change course and make the reforms it needs to sustain growth and that the country will be able to develop independently any technology the US denies them. But even if China has some success with reforms, Rajah and Leng make the pessimistic case that overall growth will still decelerate from 6 per cent before the Covid-19 pandemic to about 3 per cent by 2030 and 2 per cent by 2040.
That creates a very different geopolitical future. China would still overtake the US during the next decade or two, but its economy would only become around 50 per cent bigger at purchasing power parity, which adjusts for prices, and 15 per cent bigger at market exchange rates.
The implications of this are not reassuring for global stability. China’s demographics will weigh more and more heavily on its growth, while the US is more open to immigration. The Lowy Institute therefore projects the US starts to outgrow China after 2040. That implies China will achieve a moment of peak economic strength relative to the US at some point during the 2030s. If Chinese policymakers come to believe that is the case, then instead of time being on their side when it comes to rewriting the world order, they may perceive a limited window in which to act.
Beijing will also — quite correctly — perceive an effort by the world’s economic superpower to hold China down and keep it relatively poor. That will foster resentment. The world’s largest economy, with a limited window of strength and reasons to begrudge the existing order: it sounds like a recipe for instability. Perhaps the only thing as frightening as runaway growth in China’s economy is the opposite.