Roland Rajah and Alyssa Leng wrote . . . . . . . . .
China will likely experience a substantial long-term growth slowdown owing to demographic decline, the limits of capital-intensive growth, and a gradual deceleration in productivity growth.
Even with continued broad policy success, our baseline projections suggest annual economic growth will slow to about 3% by 2030 and 2% by 2040, while averaging 2–3% overall from now until 2050.
China would still become the world’s largest economy, but it would never enjoy a meaningful lead over the US and would remain far less prosperous and productive per person even by mid-century.
The future of China’s ongoing global rise is of great importance to both China and the rest of the world. Predicting long-term economic performance is inherently difficult and open to debate. Nonetheless, we show that substantial long-term growth deceleration is the likely future for China given the legacy effects of its uniquely draconian past population policies, reliance on investment-driven growth, and slowing productivity growth. Even assuming continued broad policy success, our projections suggest growth will slow sharply to roughly 3% a year by 2030 and 2–3% a year on average over the three decades to 2050. Growing faster, up to say 5% a year to 2050, is notionally possible given China remains well below the global productivity frontier. However, we also show that the prospect of doing so is well beyond China’s track record in delivering productivity-enhancing reform, and therefore well beyond its likely trajectory. China also faces considerable downside risks.
Our projections imply a vastly different future compared to the dominant narrative of China’s ongoing global rise. Expectations regarding the rise of China should be substantially revised down compared to most existing economic studies and especially the expectations of those assessing the broader implications of China’s rise for global politics. If China were on track to grow at 4–5% a year to 2050, as many seem to hold, it follows that China would be on course to become the world’s most dominant economy by far. With 2–3% growth, China’s future looks very different. China would still likely become the world’s largest economy. But it would never establish a meaningful lead over the United States and would remain far less prosperous and productive per person than America, even by mid-century.
The rise of China is amongst the most globally significant developments of recent decades. China’s economic transformation means there are around 800 million fewer Chinese citizens living in poverty today than would otherwise be the case. China’s rise has also reshaped the global economy, planetary ecosystem, and world politics. China is now the largest economy in the world at purchasing power parity, which corrects for price differences across countries, and the second largest at market exchange rates. It accounts for almost a fifth of global production and more than a quarter of world carbon emissions. Geopolitically, China’s rise has brought America’s ”unipolar moment” to an end, giving way to a new era of geostrategic rivalry that looks set to define international relations and global politics for decades.
China’s ongoing rise will clearly carry enormous implications for both the country itself and the rest of the world. China’s economic prospects are therefore a topic of intense debate. On the one hand, it is well accepted that double-digit growth is a thing of the past and that China faces considerable downside economic risks, including that reform might be stalling and that brewing financial fragilities could eventually trigger a crisis. Several studies argue that China’s economy could soon slow considerably. Nonetheless, most existing studies suggest China can continue to sustain robust growth averaging around 5% a year or higher to 2030. Among studies that attempt to look further ahead, most suggest China could average growth of about 3.5–4% a year over the decades to 2050.
Interestingly, expectations amongst those considering the broader implications of China’s rise for global politics tend to be notably higher at around 5–6% a year sustained to 2050. As the deep determinants of rapid economic growth are both poorly understood and highly dependent on policy and politics, many analysts evidently put a significant weight on recent performance when thinking about China’s future trajectory, essentially extrapolating the trend.
China’s past population policies mean substantial demographic decline is essentially locked in over the coming decades, with little ability for policy to materially alter the outlook.
This Analysis focuses on China’s long-term economic outlook to 2030 and further out to 2050. It contends that despite the considerable uncertainties in projecting long-term economic performance, focusing on the basic building blocks or ”proximate sources” of future economic growth is sufficient to show that China very likely faces a future of significant structural deceleration, even using relatively optimistic assumptions. Expectations regarding the rise of China should therefore be substantially revised down compared to most existing studies and especially those considering the broader geopolitical implications of China’s global rise.
China’s past population policies mean substantial demographic decline is essentially locked in over the coming decades, with little ability for policy to materially alter the outlook. Economic growth has also been incredibly reliant on capital investment — a model that has become increasingly unsustainable. By our estimate, the growth contribution of capital accumulation will roughly halve over the coming decades compared to that preceding the Covid-19 pandemic. Housing investment is entering structural decline, as urban population growth and increases in average household income both slow. Similarly, China’s ability to rely on infrastructure for growth is close to reaching its limits, after decades of remarkably high investment. While China has more room to rely on business investment to drive future growth, this too has been high and can be expected to run into diminishing returns. Since capital accumulation has accounted for three-quarters of China’s growth in recent years, this has major implications for China’s future economic prospects.
Whether China can sustain rapid economic growth will largely be determined by what happens with productivity growth. Yet Chinese productivity growth has been decelerating, and there are strong reasons to think it will continue to do so — reflecting economic theory, the international evidence, China’s own track record, and the prospect of intensifying ”decoupling” from the West. Most contemporary assessments also conclude that overall progress with key economic reforms has been mixed at best. Moreover, even if China can reverse its decelerating productivity trend, history suggests there are limits as to what can realistically be achieved, and therefore limits as to how fast China’s economy can sustainably grow even in a best-case scenario.
Pulling these pieces together using several alternative growth accounting approaches, we show that annual average Chinese economic growth can be expected to decelerate sharply to roughly 3% by 2030 and 2% by 2040, compared to the pre-Covid trend of a little over 6%. Over the almost three decades from 2021 to 2050, economic growth would average about 2–3% a year. Growing faster, up to say 5% a year, is notionally possible given China remains well below the global productivity frontier. Nonetheless, we also show that the prospect of doing so is well beyond China’s track record of delivering productivity-enhancing reform, and therefore well beyond its likely trajectory.
It is too early to judge where China’s emerging policy doctrines such as “common prosperity” might ultimately lead. It could well prove successful. But there are also ways it could prove deleterious to continued economic success.
Importantly, our argument is not based on China “failing”. Rather, a substantial growth slowdown is likely even if China continues to see a good degree of ”success” in terms of productivity growth, education, business investment, containing financial risks, and generally sustaining strong increases in average living standards. In this sense, our argument is qualitatively different to those of other China growth pessimists who predict a substantial slowdown due to increasingly deficient policy, mounting financial vulnerabilities, or the simple statistical improbability of China sustaining its growth exceptionalism forever.
One can of course readily imagine more negative scenarios along these lines. It is too early to judge where China’s emerging policy doctrines such as “common prosperity” might ultimately lead. It could well prove successful. But there are also ways it could prove deleterious to continued economic success, for instance if Chinese policy institutions struggle to evolve to meet the demand for higher quality growth and instead give way to an intensifying clampdown on China’s dynamic private sector. The growth slowdown we predict could also prove highly destabilising, given the financial vulnerabilities China has accumulated after more than a decade of rapid credit growth. The Bank for International Settlements reports total credit to China’s non-financial sector had reached around 285% of GDP by mid-2021, compared to about 140% just before the 2008–09 crisis. It is also possible that China’s official GDP statistics are simply overstated. The downside risks are therefore high, suggesting our baseline projection of substantial structural deceleration nevertheless remains a somewhat optimistic assessment.
Our projections imply a vastly different future compared to the dominant narrative of China’s ongoing global rise. For instance, if China were likely to sustain long-term growth of 4–5% a year, it would be on track to eventually become far and away the world’s largest economy and a massive economic bloc unto itself. In such a world, it would be reasonable to expect that China’s economic gravity would continue to draw in many other countries, that the Chinese yuan could displace the financial hegemony of the US dollar, that China might dominate key future technologies, and that its military expenditure could feasibly overtake the combined defence outlays of the United States and its allies. In other words, Chinese global hegemony would be a real possibility.
With long-term average economic growth of 2–3%, expectations for the future look completely different. China would still likely become the largest economy in the world in US dollar terms. But its advantage over the United States would be modest and not enough to confer any significant general competitive advantage, at least not on the basis of its economic size alone. Moreover, China would lack the economic heft needed to compete with major Western economies as a group, for example in terms of its ability to devote resources to science and innovation, military spending, or financing overseas infrastructure projects. Finally, although the average person in China would be vastly better off economically than today, China would remain far less prosperous and productive per person than the United States and other rich countries, even by mid-century.
This paper presents these arguments across eight sections. The first section discusses existing views of China’s long-term economic future and the authors’ analytical approach. The following sections then examine the outlook for demographics, housing investment, public investment, and productivity growth as sources of future growth deceleration. We then bring this together to assess China’s future growth prospects if it continues along its current trajectory as well as the realism of more bullish economic predictions. Finally, we consider the implications for the narrative around China’s global rise, particularly compared to long-term growth expectations for the rest of the world.
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