By Takatoshi Ito
At their recent summit in San Francisco, US President Joe Biden and Chinese President Xi Jinping (習近平) made progress in a few key areas. Notably, they agreed to resume direct military-to-military communications — which China had suspended last year, following a visit by then-speaker of the US House of Representatives Nancy Pelosi to Taiwan — to reduce the chances of accidental conflict. However, neither leader was negotiating from a particularly strong position: As Biden struggles with low approval ratings, Xi is overseeing a rapidly weakening economy.
The economic news out of China has been poor for some time. Growth is slowing; the population is declining; the property sector is facing huge losses; banks are grappling with nonperforming loans; and foreign investment is falling. Each of these developments has its own cause and cure, but together, they paint a grim picture — so grim, in fact, that some now wonder whether China is facing a long period of stagnation similar to the one from which Japan has only recently emerged.
Like China, Japan benefited from a prolonged period of robust economic performance — GDP growth in the 1950s and 1960s averaged 9 percent to 10 percent — before slowing to 5 percent to 6 percent growth in the 1970s and 1980s. This is not hard to explain. As incomes per capita catch up to those in advanced economies, the increase in per capita income becomes more difficult to sustain, and GDP growth slows. This pattern — known as “growth convergence” — can also be observed in Hong Kong, Singapore, South Korea and Taiwan.
This slowdown in income growth per capita might occur before an economy has reached high-income status. It might emerge at middle-income levels, so that, rather than achieving convergence, countries become ensnared in the so-called middle-income trap. China — which until a decade ago was on track to reach high-income status — might well be falling into precisely this pattern.
The decline in China’s working-age population makes this all the more likely. In Japan, a shrinking labor force is dragging down total growth by about one percentage point: The potential per capita growth rate remains in the 1.5 percent to 2 percent range, but the overall potential growth rate is estimated to be less than 1 percent. With China facing similarly unfavorable demographic trends — the legacy of decades of strict family-planning policies — the government has been forced to lower its growth target to 5 percent.
The Chinese property sector’s travails also echo Japan’s experience. In the second half of the 1980s, Japanese stock prices tripled, and land prices quadrupled, inflating an asset-price bubble that would collapse in the 1990s. So far, China’s real-estate booms — of which there have been a few in the past two decades — have not led to a bust, with prices instead plateauing at very high levels.
However, this time might be different.
For starters, China’s real-estate boom has already engulfed third- and fourth-tier cities — a foreboding sign, given that Japan’s bubble spread to provincial cities and undeveloped forest areas just before it collapsed. Moreover, unlike in Japan, Chinese developers have built a huge number of units that stand empty. The combined floor area of unsold homes in China amounted to 648 million square meters, according to China’s National Bureau of Statistics.
Then there are all the residential projects that have not been completed, owing to cash-flow issues among property developers, some of which — most prominently, Evergrande — have been unable to service their debts. These delays have driven some Chinese home buyers — who must cover the full price of the unit they are purchasing even if construction is not complete — to stop making mortgage payments.
The risks are not borne exclusively by private entities. In China — again, unlike in Japan — local governments have been deeply involved in real-estate development, leasing land to property developers and funding projects. Tumult in the property sector thus directly affects the public budget.
However, perhaps the greatest threat to China’s economic growth and development is Xi himself. Xi has spent the last few years tightening government control over all aspects of life in the country, including the economy. The regulatory crackdown on large tech companies like Alibaba, which began in late 2020, is a case in point.
Though regulators have since backed off somewhat, and China’s government is actively supporting high-tech industries like electric vehicles, Xi’s obsession with control continues to pose a serious threat to China’s prospects. Not only does it hamper innovation by domestic firms, it also discourages foreign investment.
Foreign companies, such as the polling and consultancy group Gallup, are fleeing the country. This can be partly explained by China’s economic slowdown, which has reduced the availability of high-return investment opportunities and, together with demographic trends, promises to shrink the Chinese market over time, but, with China still targeting 5 percent growth, there is clearly more going on.
In fact, foreign companies worry about becoming the target of spurious antitrust investigations and fear that the newly expanded, but deliberately vague counter-espionage law could result in them being punished for normal business activities. Of course, US restrictions on high-tech exports to and investment in China are not helping matters.
China today shares many features with Japan in the 1980s, but the biggest risks to its economic prospects are all homegrown. By prioritizing security and stability — through surveillance, control, and coercion — over economic dynamism, China’s leaders are abandoning some of the policies and principles that underpinned the country’s “economic miracle.” Unless they change course, the entire global economy would suffer.
Takatoshi Ito, a former Japanese deputy vice minister of finance, is a professor at the School of International and Public Affairs at Columbia University and a senior professor at the National Graduate Institute for Policy Studies in Tokyo.
Copyright: Project Syndicate
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