For a generation, American expectations and policy responses to China have been based on the implicit assumption of perpetually strong Chinese economic growth. Fear of China’s ascension has led to unprecedented public antipathy toward China. Both the Trump and Biden administrations have imposed tough trade measures and export controls on China. The House of Representatives has created a select committee on China as a means of pressuring the White House to be even tougher.
But expectations of the inevitability of China’s growing power need to be tempered by underlying economic and demographic trends. China’s prospects are constrained by its debt overhang, aging population, and productivity shortcomings that will restrict its future growth prospects.
Even as Congress and the Biden administration gear up for a prolonged confrontation with Beijing, China’s economic trajectory and the trade, investment, security and environmental implications of that slowdown need to be reassessed.
A slowing China
The Chinese government claims its economy grew 3 percent in 2022. The International Monetary Fund (IMF) projects China’s economy will grow by 4.4 percent in 2023, roughly half its growth rate in 2021. But such expectations will be realized only if everything goes right. Rhodium Group estimates China’s growth could be as low as 0.5 percent. This would be a far cry from the 8-10 percent growth the world had come to expect from China.
China no longer seems destined to overtake the United States as the world’s leading economy any time soon. Goldman Sachs, which formerly projected that China would become the world’s largest economy by the mid-2020s, has pushed that date back to 2035. Some analysts think it will never happen.
Every nation’s economic growth is largely a product of productivity and demography. Neither of these is on China’s side.
A 2022 IMF study concluded that while China’s total factor productivity, which measures both labor and capital inputs, rose 22 percent between 2003 and 2011, it expanded a mere 5 percent between 2011 and 2019.
Meanwhile, China’s population is aging and shrinking, down 850,000 in 2022. The United Nations estimates that the nation’s population will decline by 113 million people by 2050. In 2020, 17.8 percent of China’s population was over age 60. By 2050, that portion is expected to more than double to 38.8 percent. Fewer able-bodied, less-productive workers will only accelerate the economic slowdown.
And China’s future economic prospects may be crippled by debt. The IMF reports that China’s total public, private and corporate debt has grown from 172 percent in 2010 to 265 percent in 2021, an increase of 54 percent. The U.S. debt ratio is higher, but it is growing more slowly.
The knock-on effects
China is the third-largest export market for the United States. About 3 percent of German jobs depend on exports to China. And China is the top export market for Japan, Indonesia and Malaysia. Slower Chinese growth means less demand for those exports.
American, European and Japanese companies have invested billions of dollars in China, on the presumption that it is the consumer market of the future. Annual U.S. investment has averaged about $13 billion over the past decade. This capital inflow was predicated on now-questionable expectations. No wonder a 2022 survey of members of the European Chamber of Commerce in China found that 23 percent of European companies, the highest share in the past decade, are considering shifting current or planned investments in China to other markets. More broadly, if manufacturing in China is not as profitable as expected, it changes the calculus on the costs of decoupling and “friend-shoring” supply chains, accelerating that trend.
Recent Chinese economic growth has fueled a dramatic increase in Chinese military spending: a 7.1 percent expansion in 2022 alone. Such spending is a major reason why the U.S. is growing the Pentagon budget. If Beijing continues its military expansion amid a slowing economy, it will have to forego social and economic investments, slowing improvements in the Chinese standard of living. Or it will have to further add to its debt, imperiling future economic prospects. If Beijing curbs defense spending, China’s ability to attack Taiwan, as it has threatened, may be delayed.
Beijing has pledged to reach net-zero carbon emissions by 2060. To achieve that ambition, the World Bank estimates China needs up to $17 trillion in additional investments in green infrastructure, renewable power and electric transport. Slower economic growth will help reduce emissions — a plus. But prolonged anemic growth will make funding China’s energy transition exceedingly difficult. And Beijing’s need to preserve employment in a slow-growing economy will impede the closing of job-intensive coal mines and other polluting industries, compounding the difficulty of cutting emissions.
Xi Jinping’s ever-tightening grip on power stands in stark contrast to the recent outbreaks of civil unrest against China’s COVID lockdowns. And the COVID unrest is a reminder that the Chinese population has risen up before. In 2010, there were an estimated 180,000 public protests in China. Beijing eventually regained control. But with the unemployment rate for those ages 16-24 already at 17 percent, a prolonged economic slowdown raises the specter of even more widespread domestic unrest when the promise of a better life proves illusory.
A beleaguered Xi might be too weak and preoccupied to mount the increasingly feared action against Taiwan. Or he may accelerate such a confrontation to distract and unify the Chinese people.
What to do
An entire generation of China analysts, business leaders, diplomats and domestic politicians has a worldview shaped by assumptions of looming Chinese preeminence. Careers and fortunes have been built on expectations of China’s inevitable rise. It has taken years to better understand Chinese economic and military competition. It will not and should not change overnight.
But Washington should not ignore the possibility that China may not prove to be the powerhouse we once thought. Congress and the administration should assemble a “team B”: a group of economists, climate experts, military and foreign policy officials charged with rigorously challenging existing assumptions, plans and policies regarding current and future relations with China. Such an approach has been used successfully in the past to rethink America’s approach to the Soviet Union. This effort could be coordinated by the newly formed “China House” within the State Department.
In the end, such a reassessment will provide no simple answers. China’s trajectory is too uncertain. But while we prepare for a more challenging China, we also must not be blind to the consequences of a weaker China that will pose its own set of problems for the United States and the world.
Bruce Stokes is a visiting senior fellow at the German Marshall Fund of the United States in Washington.