The Facade has Begun to Erode: The Fallacies of China’s Economy

For three decades, China had been on the rise. With its economy continuously growing, the country reappeared in the circles of international relevance. China was the nation that would cease American dominance and reshape the world into a bipolar one.

This used to be the Zeitgeist surrounding China. Now, after more than thirty years of reoccurring economic apogees, the past and present are responsible for a reversal in China’s future course.

When Napoleon Bonaparte once famously stated that one should let China sleep as the world would change once she had woken up, he displayed a remarkable degree of clairvoyance. China has indeed changed the world. Until 2015, it remained the fastest-growing major economy in the world with an average of 6% growth over three decades. It quickly became one of the world’s biggest economies, an achievement almost unparalleled in modern history. Nonetheless, the year 2019 has been a reminder that China’s economic narrative has been imperfect.

The rave in favour of China’s success and international pedigree is logical: A superior economy equals power and success. However, what if the economy in question was primarily evaluated based on nominal GDP? In a vacuum, the latter appears stellar. Yet, it omits clarity regarding the country’s prospects as a whole. In 2011 experts began to project China as the world’s biggest economy of the future. For some, it even seemed conceivable that China would surpass the United States – all based on nominal GDP.

In 2019, China remains the world’s second-largest economy by nominal GDP ($14.2 Trillion) and the world’s largest by purchasing power parity (PPP) at $27.3 Trillion. It is a rigid contrast between perception and reality. Inevitably, a population of almost 1.4 billion has the tools to generate an overall impressively looking economy. However, size and sophistication are not always interchangeable. This is confirmed when looking at the per capita stats.

According to the IMF, on a GDP per capita income basis, China ranked 67th in the world at $10153, on the same level as countries such as Bulgaria, Lebanon and Kazakhstan. In terms of PPP per capita, China ranks 73rd at $19520, in close company with Azerbaijan, Iraq and Botswana. In comparison, Germany is at $53000, the United States at $63000. Nominal GDP therefore does not necessarily represent the overall economic influence nor a country’s relative capabilities. If it did, India would have surpassed Britain in 1850.

China had rightfully been credited for its very modern and financially capable yet a corruption-prone coastal region. However, its countryside remains vastly underdeveloped, with only ten of thirty-one provinces producing a per capita income above the national average and hundreds of millions of Chinese people continue to live in obscene poverty.

Nonetheless, projections for China’s economy had continuously been favourable, based on the extrapolation of the country’s previous track record, and the most optimistic circumstances. In China’s case, it meant projections could only move into one direction: upwards. However, China’s last three decades had been so impressive that the extrapolation was never a coherent approach in the first place. And there are some valid reasons for it.

First, not even China is immune to a standard economic principle: All economies slow down once they have developed. Hence, any substantial growth, moving forward, faces the obstruction of the economy’s increasing complexity. Unsurprisingly, the year 2019 marks China’s slowest growth rate in the last twenty-seven years at 6.2%. That is after it had slowed down from 14.2% in 2007 to 6.6% in 2018. Lofty future projections have now been recanted. For example, the IMF has China growth decreasing to 5.5% by 2024. By 2030, China GDP per capita is projected to be half of the United States’ GDP. And while no longer in the same league with Bulgaria, Lebanon and Kazakhstan, it would place China in the company of today’s Slovenia and Greece. Both not known as economic powerhouses.

Second, China had always been unlikely to sustain the previous as well as current growth rates due to its domestic policies. In 1979 China introduced its one-child policy to control the country’s rapid increase in population. With the long-term effect, that China’s overall population growth has decreased from 1.5% in the 1980’s to 1% in the 1990’s to today’s 0.6%. It makes China one of the most rapidly ageing countries in the world. As a result, the percentage of elderly dependents will be higher than the percentage of children in the country by 2030. Due to more dependent individuals, China will be burdened with a significant monetary issue in terms of pension financing. The late great Charles Krauthammer once summed up this development perfectly: “China will get old before it gets rich.”

Moreover, these figures and projections correlate with one of China’s most significant detriments: Its state ideology. China remains a de facto totalitarian state, in which its sacrosanct economy is not only dominated but to a large extent dictated by Beijing and its one-party government. In 2011, 34 of China’s largest companies listed at the Shanghai Stock Exchange were either partially or fully owned by the government. In 2016, 66.6% of China’s overall GDP was generated by state-owned companies. Hence, China’s economic growth is highly dependent on foreign investments and technology. These investments, however, are no certainty in future. A government-controlled economy will never be as profitable as a far advanced open market system in the west. Skilled workers and entrepreneurs are often not inclined to offer their labour under the aforementioned circumstances. Tens of millions have already left China and applied their crafts, invested their assets and culminated their idea in foreign countries. The next generation may also be lost already. Alienated by a subpar university system, 85% of wealthy Chinese send their children to foreign universities. A significant number of these students will never apply their skills in China nor contribute to the economy. This, combined with the demographic issues of ageing, could not even let growth stagnate, but reverse the trend back to the 90’s figures of 5%. The current developments in Hong Kong will have a significant impact on this matter. Needless to say, a second Tiananmen Square moment will not be seen as the best investment incentive by foreign patrons, nor for young Chinese, who might have hoped for a paradigm shift.

Whether China’s efforts to set up a new Silk Road or its investment in Africa in exchange for securing desperately needed raw materials will create the subsequent desired success, is not a certainty either. The projects were only made possible by China’s strong economy. It remains to be seen; how much monetary power China continues to invest, if its economy will significantly slow down. Meanwhile, the remaining states in the region have not always been cordial to one another, to begin with, and China’s goal to become, if not to maintain the role as regional – and eventually – world leader does not fall on fertile ground in a region with different cultures and vast differences in geopolitical interests.

Moreover, in many of Africa’s states, in which China has become a massive investor, governments are rather volatile. Sponsorship of dubious regimes in exchange for guaranteed access may sound promising, but only if the current government or leader remains in office and adheres to the deals made with China.

Additionally, the current trade war effects, will not have gone unnoticed by China’s competition. Particularly the US and Europe have an interest in keeping China on a short leash and hence what the world has witnessed under President Trump, might only have been the beginning of a new stance towards China. More economic scrutiny may follow.

For every action, there is an equal and opposite reaction. Or more simplified: What goes up, will come back down. Newton’s 3rd law of motion applies to China’s economy fairly well. While the success had been tremendous, the level in which it progressed was not sustainable. The Cinderella story has ended. Time for China to address its plentiful issues.