We shouldn’t call ‘peak China’ just yet

Receive free Chinese economic system updates

We’ll ship you a myFT Daily Digest electronic mail rounding up the newest Chinese economic system information each morning.

What is the financial way forward for China? Will it grow to be a high-income economic system and so, inevitably, the most important on this planet for an prolonged interval, or will it’s caught within the “middle income” lure, with progress corresponding to that of the US? This is a crucial query for the way forward for the world economic system. It can be no much less very important for the way forward for international politics.

The implications could be seen in fairly a easy method. According to the IMF, China’s gross home product per head (measured at buying energy) was 28 per cent of US ranges in 2022. This is sort of precisely half of Poland’s relative GDP per head. It additionally ranks China’s GDP per head 76th on this planet, between Antigua and Barbuda, above, and Thailand, beneath. Yet, regardless of its relative poverty, China’s GDP (measured on this method) is the most important on this planet. Now, suppose its relative GDP per head doubled, to match Poland’s. Then its GDP could be greater than double that of the US and larger than that of the US and EU collectively.

Size issues. China will certainly stay a really populous nation for a very long time. In 2050, for instance, in keeping with the UN, it will still have 1.3bn people.

So the query about China’s future on this planet could be restated within the following method: can it obtain the identical stage of prosperity relative to the US that Poland already has? That could be another doubling in its relative GDP per head. Is this actually going to be so laborious? Before concluding that it will likely be, it’s price noting that China’s GDP per head, relative to the US, went from 2 per cent to twenty-eight per cent of US ranges over 42 years, from 1980 to 2022. This is just underneath 4 doublings. Is one other doubling over, say, 20 years inconceivable?

A comparability may assist to reply this query. A rustic that has come near matching China’s efficiency within the post-second world battle period is South Korea. In the early Nineteen Sixties, its GDP per head was about 9 per cent of US ranges. It took roughly 1 / 4 of a century from 1980 for China to succeed in this level. Korea reached 28 per cent of US ranges, the place China is now, by 1988. It reached 57 per cent of US ranges, the place Poland is right this moment, by 2007. Now it has reached 70 per cent. If China matched this, it might attain Poland’s relative stage in 2022 by the 2040s and 70 per cent of US ranges by the 2050s. This could be a brand new world. (See charts).

Before rejecting this comparability out of hand, some errors have to be averted. Huge consideration is being paid proper now to China’s slowdown, its over-reliance on investment in property and its financial fragility. All that is comprehensible. But it may additionally be exaggerated. South Korea was hit by a number of massive crises, notably the debt crisis of 1982 and the Asian financial crisis of 1997. Yet, in response to those shocks, Korea adjusted and powered onwards. It didn’t expertise extended relative stagnation, as Japan did after 1990. On the opposite, Korea, whose GDP per head was a 3rd of Japan’s within the Nineteen Fifties, is now richer than its erstwhile imperial grasp. Taiwan, by the best way, has carried out even higher than South Korea. No marvel so many Taiwanese want to stay impartial.

True, one can put ahead a protracted record of the explanation why China should have reached the tip of the street on its staggeringly fast catch-up on the economies on the technological frontier. These embody an ageing inhabitants, structural imbalances, monetary fragility, a deteriorating international surroundings, and right this moment’s arbitrary and oppressive authorities. These are all completely authentic factors.

The most intractable financial drawback is over-reliance on credit-fuelled funding, not consumption, as a supply of demand and the parallel over-reliance on capital accumulation, not innovation, as a supply of rising provide. Thus, from 2009 to 2022 (inclusive) the contribution of will increase in “total factor productivity” (a measure of effectivity in useful resource use) averaged about 0.5 proportion factors a yr, far beneath the 2 proportion factors a yr achieved from 2000 to 2008. That can be far too gradual.

Yet it is usually price remembering the strengths of this huge nation, which graduates 1.4mn engineers a year, has the world’s busiest patent workplace, has a extremely entrepreneurial inhabitants, and is exhibiting world-leading potential in, to take just one instance, electrical autos. In info expertise, it already appears far forward of the Europeans. In sum, can China really not match Poland?

The greatest questions of all about the way forward for the Chinese economic system concern politics, each home and international. Domestically, does China have a management that wishes to proceed with fast progress or is it now inclined to view stability as extra fascinating? Is it ready to take the steps wanted not just to extend demand now, however to sort out the structural issues of over-saving and over-investment, over-reliance on the property market, extreme leverage, and so forth? Is it ready to offer personal companies their head as soon as once more or is it decided to maintain them underneath agency (and inevitably daunting) management? Can it persuade the Chinese those who, after the traumas of Covid, they are often assured sooner or later as soon as once more? Adam Posen of the Peterson Institute of International Economics has argued powerfully that they can not. I’m not satisfied. They modified within the late Seventies on a far greater scale. Of course, the management additionally modified. Will it this time, too? Or is it fastened for years forward?

As vital is the opposed international surroundings. China’s entry to world markets and expertise is worsening. There is even a danger of battle. It will take nice dedication to beat the previous and knowledge to keep away from the latter.

So, sure, it’s certainly potential that we’re watching the tip of China’s rise. But it’s not inevitable. Above all, what occurs will rely extra on Chinese decisions than on western needs.

martin.wolf@ft.com

Follow Martin Wolf with myFT and on X