Will China get rich? The dawn of a new era of much slower growth

BEIJING, July 18 (Reuters) – China is entering an era of much slower economic growth, which raises a frightening possibility: it may never get rich.

Whether the world’s second-largest economy is advancing 3-4% annually or flirting, as some economists predict, with “lost decades” of stagnation like Japan, it looks set to disappoint its leaders, its youth, and much of the world. .

Policymakers hoped to narrow the development gap between China and the United States. Chinese youth went to universities to study advanced economy jobs. Africa and Latin America depend on China buying their goods.

“It is unlikely that the Chinese economy will outpace the United States in the next decade or two,” said Desmond Lachman, a senior fellow at the American Enterprise Institute.

He expects growth to slow to 3%, which “will look like a recession” when youth unemployment is already above 20%. “This is not good for the rest of the global economy,” he added.

When Japan began to recession in the 1990s, it had already surpassed the average per capita GDP of high-income economies and was approaching US levels. However, China is just above the middle income point.

Growth in the second quarter slowed to 6.3%, given the low base caused by COVID-19 lockdowns last year, piling pressure on Chinese leaders who are expected to meet this month to discuss short-term consolidation and long-term reforms. The April-June data puts 2023 growth on track at around 5%, with slower rates thereafter.

But China’s average annual growth has been around 7% in the past decade, and more than 10% in the first decade of the 21st century.

Spurred on by such a loss of momentum, economists no longer attribute weak household consumption and private sector investment to the effects of the pandemic, blaming structural ills instead.

These include the bursting of a bubble in the real estate sector, which accounts for a quarter of output; One of the deepest imbalances between investment and consumption. a mountain of local government debt; and the Communist Party’s firm hold on society, including private businesses.

China’s workforce and consumer base are shrinking while the pool of retirees is expanding.

He said, “The demographic problem, the hard landing of the real estate sector, the heavy domestic government debt burden, the pessimism of the private sector, as well as the tensions between China and the United States, do not allow us to adopt an optimistic view towards growth in the medium to long term.” Wang Jun, chief economist of Huatai Asset Management.

China’s National Development and Reform Commission did not respond to Reuters’ questions about growth prospects, structural weaknesses and reform plans.

Exit ways

Chairman of the National Council for Reform and Development Cheng Shanjie, in a July 4 article published in the official Qiushi magazine, made a rare reference to the middle-income trap, saying that China needs to “accelerate the construction of a modern industrial system” to avoid it.

Cheng was referring to the struggle of developing countries to move from middle to high income levels due to rising costs and declining competitiveness.

Economists point to China’s electric car boom as a sign of progress, but much of its industrial park is not modernizing at the same speed. Overseas car sales account for only 1.7% of exports.

“Many observers will look at some companies and say, wow, China can come up with all these great products, so the future must be bright. My question is: Do we have enough of these companies?” said Richard Koe, chief economist at the Nomura Research Institute.

Policymakers said they wanted household consumption to drive growth, without hinting at concrete steps.

Boosting consumer demand may redirect resources away from subsidizing manufacturing exporters, said Juan Orts, a China economist at Fathom Consulting, which partly explains the reluctance toward such reforms.

“We don’t think the authorities will stick to this path,” Orts said, describing it as a “way out” from the economic recession.

Instead, China has taken steps in the other direction.

President Xi Jinping’s “shared prosperity” campaign against inequality has encouraged salary cuts in finance and other sectors. The city’s deteriorating financial situation cut civil servant salaries, creating a deflationary spiral.

Zhao, a manager at a bank in Beijing, feels she will never get rich, and her salary is kept unchanged by several promotions. Instead of working hard, she said, she plans to retire in her 40s in a smaller, cheaper city.

“I missed the golden age of banking,” Zhao said, speaking on condition of anonymity in part because she was not authorized to speak to the media.

Many economists have called for better public health care, higher pensions, unemployment benefits, and other building blocks of a social safety net to give consumers the confidence to save less.

Central bank adviser Cai Fang this month called for stimulus to consumption, including changes to China’s residence permit, or hukou, which deprives millions of rural migrants in the cities where they work from public services.

Zhu Ning, deputy dean of the Shanghai Institute of Advanced Finance, said improving social welfare could make growth rates of 3-4% more sustainable.

‘last chance’

Koo said China’s problems are more difficult than they were in Japan a generation ago, giving policymakers room for error if they seize the “last chance” to reach the standards of living in the developed world.

In his estimation, China is experiencing a “balance sheet recession”, with consumers and businesses paying down debt rather than borrowing and investing.

He said this is how a depression begins and that the only remedy is “quick, large and sustained” fiscal stimulus, which he did not see imminent given Chinese debt concerns.

Moreover, he said, incentives must be productive, complemented by changes that allow the private sector to emerge from the shadow of the state, including through improved relations with source countries for foreign investment.

But China will need to reverse course.

Infrastructure investment in recent years has generated more debt than growth.

As major economies try to reduce dependence on China, Beijing remains locked in tit-for-tat trade battles, most recently over metals used in semiconductors.

“Every time the United States announces an anti-China policy, the Chinese government comes up with a similar policy. But Americans are not in the middle-income trap. And China is too,” Ko said.

“If the Chinese don’t achieve their Chinese dreams, you’ll probably have 1.4 billion people who aren’t very happy there, which could be somewhat destabilizing.”

Additional reporting by Liangping Gao, Elaine Zhang, Ziyi Tang, Kevin Yao, and Joe Cash in Beijing; Written by Marius Zaharia; Editing by David Croshaw.

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