29 August 2018

Four Possibilities for China's Economic Future

The re-emergence of China as a major global economic power over the past 50 years is one of the greatest economic developments in history.  In the span of just half a century, China went from being one of poorest and most isolated countries in the world to a country that is expected to become the largest economy in the world in the near-future.  In the process, hundreds of millions of people have been lifted out of abject poverty as China has risen to become a middle-income country in just a few decades.  When China’s modern economic journey began in the early 1980s, its economic output was less than half of that of the United Kingdom and France, and was even much smaller than that of Italy.  Today, China is the world’s second-largest economy, with output that is now almost double of that of the UK, France and Italy combined.  With such a large economy, it is inevitable that China will exert a massive influence on the global economy.  However, the future direction of China’s economy remains uncertain, no matter how smooth official government economic figures for China may appear.  In fact, there are four possibilities for the direction of China’s economy in the coming years, each of which would have a different impact on the global economy and China’s role in it.


Scenario #1: China Becomes a Developed Economy by 2050

This is the best-case scenario for the Chinese economy.  According to this scenario, the Chinese economy will avoid major economic dislocations in the coming decades and, while growth rates will trend downwards, they will remain well above average global economic growth rates until at least the middle of this century.  Moreover, this would allow China to overtake the United States to become the world’s largest economy (on a nominal basis) within the next 15 years.  With growth rates remaining well above the global average for the next couple of decades, by the middle of the century, China’s level of per capita GDP would exceed that of some countries that are today considered developed economies (such as Italy and Spain), allowing China to make the claim that it was a fully-developed economy.  This may seem far-fetched, but one should remember that, as late as the 1960s, South Korea was considered to be a very poor country, but today, has an economy that is consider fully developed and wealthy.  For this scenario to come to fruition in China, the country will have to maintain its export competitiveness, while at the same time, consumer spending levels will have to continue to grow at a strong pace for decades to come.  This is clearly the scenario that Beijing hopes will become reality, as its economic policies are clearly designed to maintain export and domestic growth for the Chinese economy for the foreseeable future.


Scenario #2: Volatility Increases, But China’s Upward Path Continues

This scenario envisions a future in which China’s economy generally continues to generate rates of growth well in excess of the global average, but also experiences a series of crises that temporarily result in sharp declines in growth.  In many ways, this scenario is akin to the one experienced by the United States in the final decades of the 19th century and the first decades of the 20th century, as the US economy generally grew at a rapid pace, despite a series of major recessions.  Of course, the US was already a wealthy country by the late 19th century, while China is now just a middle-income economy, but many of the comparisons are valid.  Under this scenario, China would overtake the US to become the world’s largest economy sometime around the year 2035, but it would likely fall a little short of being classified as a fully-developed economy by the middle of the century.  Given the multitude of risks facing the Chinese economy, this is likely to be a much more realistic scenario that the first one.  Moreover, it remains to be seen how China would be impacted by such economic crises, both politically and socially, factors that could have a significant impact on China’s economic future.


Scenario #3: China Avoids a Hard Landing, But Growth Slows Significantly

Like the first scenario, this one suggests that China will avoid major economic crises in the coming decades.  However, this scenario also envisions much lower rates of economic growth in the future for China.  If these lower rates of growth occur in the near future, this would delay China’s ascension to the position of the world’s largest economy for some time, particularly if the United States is able to record relatively healthy rates of growth at the same time.  Caught in such a “middle-income trap”, China could find itself stuck as a middle-income economy well into the latter part of this century.  Among the factors that make this scenario a realistic possibility for China are the country’s demographic situation, as China faces the prospects of an aging population and a rapidly-declining working-age population.  Overall lower rates of growth for the global economy could also contribute to much lower rates of growth in China in the future, as export demand weakens.  This is a scenario that Beijing is also considering, as the Chinese government will likely focus on avoiding crises, while preparing the Chinese population for a slower-growth future.


Scenario #4: China Succumbs to Multiple Threats and Growth Comes to a Halt

Many economists believe that the Chinese economy is on the verge of a major downturn as multiple risk factors threaten to derail what has been the world’s most successful economy in recent decades.  Externally, the threat of a global trade war could bring an end to China’s rise as the center of global manufacturing, as it was manufactured exports that allowed China to experience its economic miracle in recent decades.  Domestically, soaring debt levels and dangerous asset bubbles could slow consumer and business spending inside China, damaging its ability to rebalance the economy away from its dependence upon exports for growth.  Should these risks become reality, China would certainly experience at least one major economic downturn and could even enter a prolonged period of lower growth and increased instability.  Were this to occur, China’s economic output might not pass that of the United States at any time in the foreseeable future, especially if the US economy were to continue to generate growth as China floundered.  While this scenario is unlikely, it is nevertheless Beijing’s greatest fear, and the one scenario that it will do everything to prevent.


While the level of volatility has increased in recent years and a number of risks have been allowed to fester, China’s economy continues to record healthy rates of growth.  Nevertheless, it is inevitable that more threats to China’s economic success will emerge in the years ahead.  Moreover, it is a sure bet that the real performance of China’s economy will not be accurately measured by the official economic statistics provided by the Chinese government.  Nevertheless, there are many reasons to believe that, despite these growing threats and the make-believe data coming from Beijing, the Chinese economy will continue to generate growth, even if that growth is significantly lower than what was generated in the past.  As such, there is no reason to expect that China’s economy will come off the rails, or that China will not eventually become the world’s largest economy at some point in the coming decades.  Moreover, as economic growth will exceed population growth, China will become an ever-wealthier country, a development that will certainly play a major role in generating growth for the rest of the global economy in the years ahead.