China’s ambition to become the world’s largest economy has been hampered by COVID-19, the real estate crisis, and an aging population. Boosting growth will be the primary focus at an important Communist Party meeting.
For decades, policymakers and economists have been fixated on the idea of China surpassing the United States as the world’s largest economy. They argue about the implications when the US, one of the most dynamic and productive economies, is overtaken by an authoritarian regime with a workforce of three-quarters of a billion people.
Predictions about when China would surpass the US have been frequent since the 2008/9 financial crisis, which slowed growth in the US and Europe for many years. Before what became known as the Great Recession, China experienced double-digit annual GDP growth for at least five years. In the decade following the crisis, China’s economy continued to expand by 6%-9% annually—until COVID-19 struck.
As if the pandemic—which led to strict lockdown measures that severely impacted the economy—wasn’t enough, the Asian powerhouse also faced a real estate crash. At its peak, the property market accounted for a third of China’s economy. However, rules introduced by Beijing in 2020 limited the amount of debt property developers could take on. Many firms went bankrupt, leaving an estimated 20 million unfinished or delayed homes unsold.
Simultaneously, declining trade relations with the West also weakened growth in the world’s second-largest economy. Having encouraged China’s rise for decades, by the late 2010s, the US shifted to containing Beijing’s economic and military ambitions, delaying China’s advance.
The apparent downturn in the Chinese economy led to the emergence of a new term about a year ago: “Peak China.” This theory suggested that the Chinese economy was now burdened by structural issues such as heavy debt, slowing productivity, low consumption, and an aging population. These weaknesses, along with geopolitical tensions over Taiwan and decoupling of trade by the West, sparked speculation that China’s impending economic supremacy might be delayed or never occur.
However, Wang Wen from Renmin University’s Chongyang Institute for Financial Studies told DW that the notion of Peak China was a “myth,” noting that China’s total economic output reached almost 80% of US output in 2021. Wang argued that as long as Beijing maintained “internal stability and external peace,” the Chinese economy would soon overtake the US. He cited the desire of millions of rural Chinese to move to urban areas, where earnings and quality of life are reportedly much higher.
“China’s urbanization rate is only 65%. If it reaches 80% in the future, another 200 to 300 million people will enter urban areas, generating a huge increase in the real economy,” he said.
Other economists, however, believe that the issues sparking the Peak China narrative have been building for several years. “The Chinese economy grew so fast in the early 2000s because of high productivity,” Loren Brandt, an economics professor at the University of Toronto, told DW. He noted that productivity accounted for about 70% of GDP growth during China’s first three decades of reform, initiated in 1978. “After the financial crisis, productivity growth just disappeared. It’s now maybe one-quarter of what it was before 2008,” he added.
Observers had hoped that an upcoming key meeting of China’s Communist Party would propose major stimulus measures to address the numerous short-term economic challenges. However, they now believe Beijing will instead target growth in sectors like advanced and green technology while also boosting pensions and the private sector.
China’s total debt has increased to more than 300% of GDP, with a significant portion owned by local governments. Foreign direct investment has fallen for 12 consecutive months, dropping 28.2% in the first five months of 2024 alone. Despite significant investments to ramp up production of new technologies, some of Beijing’s trade partners are restricting Chinese imports.
“Here is an economy that has invested enormously in [research and development], people, and first-class infrastructure. But it is not being leveraged in a way that’s helping to sustain growth in the economy,” Brandt told DW.
Under President Xi Jinping, Beijing has moved towards more centralization of the economy through state ownership of industries. China’s leaders decided the next wave of growth would be driven by domestic consumption, reducing reliance on foreign exports. However, many social programs have not kept pace with China’s economic progress. Consumers, unable to rely on low-cost healthcare, education, and more than a basic state pension, are wary of spending more of their savings. Their household wealth has dropped by up to 30% due to the property crash, Brandt said.
“[Decentralization] during the first two or three decades gave room for local governments to make decisions,” he added. “China benefited enormously from the autonomy, freedom, and incentives that they had, and the enormous dynamism from the private sector. These issues are going to be much harder to reverse, especially under the current leadership.”
In the late 2000s, the private sector made up close to two-thirds of the Chinese economy, but by the first half of last year, that share had dropped to 40%. The state-run and mixed-owned sector has grown much larger. While China now has the most firms listed in Fortune magazine’s ranking of leading global corporations, those companies are much less profitable than their US counterparts, averaging profit margins of 4.4% compared to 11.3% for US multinationals.
The big fear is that all these factors could cause China’s economy to follow the path of Japan. After World War II, Japan experienced an economic miracle, marked by decades of high growth that created a massive stock market and real estate bubble. At its peak, Japan was predicted by some economists to overtake the US as the world’s largest economy. Then in 1992, the bubble burst, fortunes were lost, and the economy went into a tailspin. Japan has since failed to recover the lost growth.
Chinese economists, meanwhile, point out that the country’s industrial production is larger than that of the US. Last year’s GDP growth of 5.2% was more than double the US growth rate. The Asian country’s economy already surpassed the US in 2016 when measured in purchasing power parity (PPP).
“In the past 45 years, China’s development has faced many economic problems,” Wang told DW. “But compared with the depression 30 years ago, the high debt 20 years ago, and the housing crash 10 years ago, the current problem is not the most serious.”
