The Western media is full of stories of China’s impending collapse. Attention is drawn to lockdowns enforced by militia with automatic weapons in Shenzhen; home buyers banding together to refuse to pay mortgages on unfinished properties ‘in more than 100 cities’ according to the New York Times, sudden lockdowns in Shanghai leaving people ‘without food or medicine’ again according to the New York Times.
Has the Chinese economic miracle ended and will the country fail in its joint ambitions to become a ‘high income economy by the end of the 14th Plan period (2025)’, and to overtake the US economy in nominal dollar GDP?
China has even greater ambitions, to reach a GDP per capita level of 50% of the US by 2049, which given the disparity in populations would make the Chinese economy nearly twice as large as the US.
Our provisional answer is that although growth has been hit and some timetables will have to be readjusted, there is still potential for faster growth in China than in many other economies.
China’s twin current problems flow from the target of Zero Covid and the collapse of its soaring property markets.
The Covid policy leads to frequent lockdowns disrupting production and of course everyday life. As China is the last major economy to pursue a Zero Covid policy, the costs of trying to eradicate the highly transmissible Omicron variant of the virus in the population are especially jarring compared to other countries who have learned to live with the virus. However, much political capital has been spent on sticking to this approach by the Chinese leadership and realistically, the policy will not be adjusted until after the 20th National Party Congress of the Chinese Communist Party, starting on 16 October, has been completed.
But it is interesting to note that in Chinese controlled Hong Kong, the policy has been quietly adjusted and Hong Kongers are now aiming to live with Covid, much in line with the West. Western companies are now licensing vaccines for use in China (although Moderna has refused) – a point we explored in an earlier Eye which we believe could mutually benefit both the West and China – while Chinese vaccine manufacturers have made great strides since their earlier and premature announcements. This makes a ‘Western style’ strategy possible although it will certainly not be called that! Hong Kong is almost certainly a test bed and as long as the adjusted policy does not create problems, expect the policy change to be rolled out over the rest of China later this year or early next year.
The property crisis is less easy to manage, though the People’s Bank of China has limited the scale of the consequences so far. Chinese local authorities have used land sales and sales of bonds based on land values to finance infrastructural development. This will get harder as land values are impacted by falling property prices. Different indices show residential property prices currently down by between 2% and 7%. It is quite possible that the falls will eventually be as much as a quarter.
But even that, though it would act as a drag on the economy, should only reduce growth, not bring it to a halt.
Our provisional worst-case scenario for China, against a background of likely world recession, remains growth of 1½% next year and our central forecast is 4% plus, closer in line to the official view.
The US is also likely to go into recession next year and it is highly likely that the dollar will start to weaken as US interest rates start to fall back. While parts of US manufacturing are likely to have a long-term advantage from cheap energy, others will suffer from less sustainable methods of production.
So, China is still likely to be on target to be a high-income economy and may even have already achieved that status. Whether and when it overtakes the US in dollar GDP is as yet unclear, though overtaking at some point in the early to mid-2030s still seems likely. Our upcoming WELT 2023 report, published every year on Boxing Day, will take a closer look at the data and update our predictions for global GDP rankings for the next 15 years.
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