Unlocking the Truth: Why It’s Premature to Label China’s Potential Decline as ‘Peak China’

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What does the future hold for China’s economy? Will it continue to grow and eventually become the world’s largest high-income economy, or will it be trapped in “middle income” status with a growth rate similar to that of the US? This is a crucial question that not only impacts the global economy but also global politics.

To put things into perspective, according to the International Monetary Fund (IMF), China’s gross domestic product (GDP) per capita (measured by purchasing power) was only 28% of the US levels in 2022. This is roughly half of Poland’s relative GDP per capita. China currently ranks 76th in the world in terms of GDP per capita, sandwiched between Antigua and Barbuda and Thailand. However, despite its lower per capita income, China’s total GDP is the largest in the world. Now, imagine if China’s relative GDP per capita doubled to match Poland’s. Its GDP would surpass that of the US and even the combined GDP of the US and European Union.

Size matters. China will remain a highly populous country for the foreseeable future. By 2050, the United Nations projects that China will still have a population of 1.3 billion people.

So, the question about China’s place in the world can be rephrased as follows: Can China achieve the same level of prosperity relative to the US that Poland has already attained? This would entail doubling its relative GDP per capita. Is this an insurmountable challenge? Before jumping to conclusions, it’s worth noting that China’s GDP per capita relative to the US increased from 2% to 28% over a span of 42 years, from 1980 to 2022. That’s nearly four doublings. Can we then discount the possibility of another doubling in the next 20 years?

To gain further insights, let’s look at a relevant comparison. South Korea is a country that has come close to matching China’s rapid economic growth in the post-World War II era. In the early 1960s, South Korea’s GDP per capita was around 9% of US levels. It took roughly 25 years for China to reach this point. By 1988, South Korea had reached 28% of US levels, the same as China’s current position. It then reached 57% of US levels, comparable to Poland today, by 2007. Currently, South Korea stands at 70%. If China could replicate this trajectory, it would reach Poland’s relative level by the 2040s and reach 70% of US levels by the 2050s. This would truly be a transformative achievement.

Now, before dismissing this comparison outright, we must avoid making errors. While it is understandable to be concerned about China’s economic slowdown, its heavy reliance on property investment, and its financial vulnerabilities, these concerns might be overstated. South Korea faced significant crises, such as the 1982 debt crisis and the 1997 Asian financial crisis. However, it managed to overcome these challenges and continue its upward trajectory. Unlike Japan, which experienced prolonged stagnation after 1990, South Korea moved forward. In fact, South Korea, whose GDP per capita was one-third of Japan’s in the 1950s, now boasts a higher GDP per capita than its former imperial master. Taiwan has also outperformed South Korea in many aspects. It’s no wonder that many Taiwanese desire independence.

Undeniably, one can list numerous reasons why China’s rapid catch-up with developed economies might be nearing its end. These include an aging population, structural imbalances, financial fragility, an unfavorable global environment, and an authoritarian government. These are all valid concerns.

The most challenging economic issue is China’s heavy reliance on credit-fueled investment rather than consumption as a source of demand, as well as its dependence on capital accumulation instead of innovation for supply-side growth. From 2009 to 2022, the contribution of total factor productivity (a measure of resource use efficiency) to China’s GDP growth averaged around 0.5 percentage points per year, significantly lower than the two percentage points per year achieved from 2000 to 2008. This rate of improvement is far too slow.

However, it’s essential to also acknowledge China’s strengths. China graduates 1.4 million engineers every year, houses the busiest patent office globally, has a highly entrepreneurial population, and shows great potential in sectors like electric vehicles. In terms of information technology, China seems to be ahead of Europe. Ultimately, can China truly not catch up to Poland?

The biggest unknowns regarding the future of the Chinese economy are political, both domestically and globally. Domestically, does China’s leadership desire to continue rapid growth, or do they prioritize stability? Are they willing to take the necessary steps to address structural issues like over-saving, over-investment, reliance on the property market, excessive leverage, and more? Will they allow private businesses to flourish or maintain strict control over them? Can they instill confidence in the Chinese people after the hardships caused by the COVID-19 pandemic? Adam Posen of the Peterson Institute of International Economics argues that instilling confidence is a significant challenge, but history has shown that China has undergone significant transformations before. Will this be another turning point, or will the current leadership remain fixed for years to come?

Equally important is the global environment that poses challenges for China. China’s access to world markets and technology is gradually diminishing, and there is even a risk of conflict. Overcoming these challenges will require determination and wisdom.

In conclusion, it is indeed possible that this might be the end of China’s rise, but it is not inevitable. Ultimately, what unfolds will depend more on the choices made by China rather than the desires of Western nations.


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