BEIJING, July 18 (Reuters) – China is entering an era of much lower economic growth, offering a frightening prospect: it may never get rich.
Whether the world’s second-largest economy is limping along at 3-4% annually or flirting, as some economists expect, with Japan-like “lost decades”[ads1]; of stagnation, it appears to be disappointing its leaders, its youth and much of the world. .
Policymakers hoped to reduce China’s development gap with the United States. Young Chinese went to universities to study for advanced finance jobs. Africa and Latin America count on China to buy their goods.
“It is unlikely that the Chinese economy will surpass that of the United States in the next decade or two,” said Desmond Lachman, senior fellow at the American Enterprise Institute.
He expects growth to slow to 3%, which “will feel like an economic recession” when youth unemployment is already above 20%. “This is also not good for the rest of the world economy,” he added.
When Japan began to stagnate in the 1990s, it had already exceeded the average GDP per capita of high-income economies and was approaching US levels. However, China is only just above the middle income point.
Second-quarter growth of 6.3% underwhelmed, given the low base caused by last year’s COVID-19 shutdowns, adding to pressure on Chinese leaders who are expected to meet this month to discuss a short-term boost and longer-term solutions. The April-June data puts 2023 growth on track for about 5%, with lower rates thereafter.
But China’s annual growth averaged around 7% in the past decade, and more than 10% in the 2000s.
Because of such a loss in momentum, economists are no longer attributing weak household consumption and private sector investment to the effects of the pandemic, and are instead blaming it on structural ills.
These include the bursting of a bubble in the property sector, which accounts for a quarter of output; one of the deepest imbalances between investment and consumption; a mountain of debt to local government; and the Communist Party’s tight grip on society, including private enterprises.
And China’s workforce and consumer base are shrinking while the pool of retirees expands.
“The demographic problem, hard landing of the real estate sector, heavy local government debt burden, private sector pessimism as well as China-US tensions do not allow us to have an optimistic view of medium to long-term growth,” said Wang Jun, chief economist of Huatai Asset Management.
China’s National Development and Reform Commission (NDRC) did not respond to Reuters questions about growth prospects, structural weaknesses and reform plans.
NDRC chief Zheng Shanjie, in a July 4 article in the official “Qiushi” magazine, rarely referred to the middle-income trap, saying China needed to “accelerate the construction of a modern industrial system” to avoid it.
Zheng referred to the struggle of developing countries to transition from middle to high income levels due to rising costs and declining competitiveness.
Economists cite China’s electric vehicle boom as evidence of progress, but much of the industrial complex is not upgrading at the same rate. Overseas car sales make up only 1.7% of exports.
“A lot of observers will look at some of the companies and say, wow, China can come up with all these amazing products, so the future should be bright. My question is: Do we have enough of these companies?” said Richard Koo, chief economist at Nomura Research Institute.
Politicians have said that they want household consumption to drive growth, without suggesting specific measures.
Juan Orts, China economist at Fathom Consulting, said increased consumer demand could divert resources away from supporting manufacturing exporters, which partly explains hesitation toward such reforms.
“We don’t think the government will commit to that path,” Orts said, describing it as the “way out” of economic doldrums.
Rather, China took steps in the other direction.
President Xi Jinping’s “shared prosperity” drive against inequality has encouraged wage cuts in finance and other sectors. Deteriorating city finances led to pay cuts for civil servants, feeding a deflationary spiral.
Zhao, an executive at a Beijing-based bank, feels she will never be rich, her salary remaining unchanged through multiple promotions. Instead of working hard, she said, she plans to retire in her 40s to a smaller, cheaper city.
“I missed the golden era of banking,” Zhao said on condition of partial anonymity since she was not authorized to speak to the media.
Many economists have called for better public health care, higher pensions and unemployment benefits and other building blocks for a social safety net to give consumers the confidence to save less.
Central bank adviser Cai Fang this month called for spending stimulus, including changes to China’s residence permits, or hukou, which deny public services to millions of rural migrants in the cities where they work.
Zhu Ning, vice dean of the Shanghai Advanced Institute of Finance, said improving social welfare could make growth rates of 3-4% more sustainable.
Koo said China’s problems are more challenging than Japan’s a generation ago, leaving room for error for policymakers if they seize the “last chance” to reach developed-world living standards.
In his view, China is experiencing a “balance sheet recession”, with consumers and businesses paying back debt instead of borrowing and investing.
This, he said, is how depressions start, and the only cure is “quick, substantial and sustained” fiscal stimulus, which he did not see coming given China’s debt concerns.
Beyond that, he said that the stimulus must be productive and complemented by changes that allow the private sector to emerge from the state’s shadow, including through better relations with source countries for foreign investment.
But China must reverse course.
Infrastructure investments in recent years have generated more debt than growth.
As major economies try to reduce dependence on China, Beijing remains locked in trade battles, the latest over metals used in semiconductors.
“Every time the US announces an anti-China policy, the Chinese government comes up with an equivalent one. But Americans are not in the middle-income trap. China is,” Koo said.
“If Chinese people don’t achieve their Chinese dreams, you might have 1.4 billion not very happy people over there, which could be quite destabilizing.”
Reporting by Liangping Gao, Ellen Zhang, Ziyi Tang, Kevin Yao and Joe Cash in Beijing; writing by Marius Zaharia; editing by David Crawshaw.
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