China’s rise to the status of an economic superpower that can threaten and potentially surpass the US seems to have become the de facto narrative.
Why China's relentless economic rise isn't inevitable
Since China has achieved growth rates vastly higher than its Western counterparts for decades, made overseas investments in every part of the globe, and seen its tech industry rival Silicon Valley, it is easy to see why.
At current growth rates, China's economy is expected to overtake the US in about ten years.
Though the country continues to grow, it also has significant domestic issues that may cause it to slow or stumble.
Its massive army of workers has helped propel it up the global ranks, but its huge 1.4 billion population also means its gross domestic product (GDP) per person is actually quite low – just a quarter of the US.
President Xi Jinping recently vowed that China would join the ranks of high-income economies by 2049, the 100th anniversary of the founding of the People’s Republic.
To do this, it needs to experience annual growth rates of 1.7 percentage points more than the US, according to Professor Yao Yang of Peking University. As America’s long-term growth rate is about 2%, China needs to hit 3.7% GDP growth each year – which is actually a lot lower than the 6.5% it's registering at the moment.
Premier Li Keqiang has set the same target of 6.5% for this year.
So if China’s economy continues on its current trajectory, it will hit Xi’s target easily. However, the headwinds it faces are strong.
China has one of the highest rates of combined corporate, personal and government debt in the world, estimated at more than 282% of its GDP. In terms of where it stands globally; Japan, at 417%, has more debt, and the US and Eurozone have less at 258% and 256% respectively. However, China's debt has been growing much faster than its GDP, which is a red flag for most analysts.
The country's labor productivity rose 3.7% in 2015, but that is a sharp drop from the 8.1% average it reported annually between 2007 and 2013. Countries can’t afford to pay their citizens higher wages if the pace of output falls. And with every Chinese worker generating just one-fifth of the output of an American worker, catching up to the States is going to be tough.
The number of Chinese people above the current national retirement age of 60 is expected to jump from 222 million in 2015 to more than 330 million by 2050. This will put more of a financial burden on a shrinking workforce. Young Chinese workers struggling to raise their own families will also have to pay for the retirement of their parents.
Inefficient state firms
Chinese state-owned firms account for 40% of GDP but only 20% of employment. They are making money at the moment, but for many years have been yo-yo-ing between making profits and losses, draining resources better utilized by the private sector.
China has a lot of positives, of course. It has achieved economic growth above 10% for decades, astonishing the rest of the world’s economies. The country also steered clear of the financial crisis in 2008 that caused massive unemployment and a near collapse of the US economy, and which left many European nations, such as Greece, struggling to regain lost growth. It has avoided any major domestic disturbances – at the cost of being perceived as a country that suppresses personal freedoms – while delivering improved healthcare and general welfare to its citizens.
But China may be standing at a crossroads.
Many analysts predict that China’s unstable debt load, coupled with a possible property bubble, could lead to a meltdown similar to what the US endured eight years ago. China is like the acrobat balancing on a high wire – likely to make it to the other end, but at risk of a big fall.