BEIJING, July 18 (Reuters) – China is entering an era of much slower economic growth, making the daunting prospect that it may never get rich.
Whether the world’s second-largest economy grows briskly at 3-4% a year or, as some economists predicted, flirts with a “lost decade” of stagnation like Japan. It is likely to disappoint national leaders, young people and much of the world. .
Policy makers hoped to narrow the development gap between China and the United States. Chinese youths went to college to get jobs in developed countries. Africa and Latin America expect China to buy commodities.
“The Chinese economy is unlikely to overtake the U.S. economy within the next 10 to 20 years,” said Desmond Lachman, senior fellow at the American Enterprise Institute.
He expects growth to slow to 3% and, with youth unemployment already above 20%, “will feel like a recession.” “It’s also not good for the rest of the world economy,” he added.
When Japan began to stagnate in the 1990s, it was already above the average GDP per capita of high-income countries and approaching the level of the United States. But China is just above the middle income point.
Given the low base from last year’s COVID-19 lockdowns, the 6.3% growth rate in the second quarter was underwhelming and the economy plans to meet this month to discuss a short-term boost and a long-term fix. pressure on Chinese leaders is mounting. April-June data show growth is expected to be on track at about 5% in 2023 before slowing.
However, China’s annual growth has averaged about 7% over the past decade, surpassing 10% in the 2000s.
With this slowing momentum, economists no longer attribute the slowdown in household consumption and private investment to the effects of the pandemic, but instead blame it on structural ill effects.
These include the bursting of the real estate sector, which accounts for a quarter of output. One of the most serious imbalances between investment and consumption. Mountains of local government debt. and the strict control of the Communist Party over society, including private enterprises.
And while China’s workforce and consumer base are shrinking, its retiree base is expanding.
“Demographic issues, a hard landing in the real estate sector, heavy local government debt burdens, private sector pessimism, and the US-China conflict do not allow for optimism about medium- to long-term growth,” he said. rice field. Wang Jun, chief economist at Huatai Asset Management, said:
China’s National Development and Reform Commission (NDRC) did not respond to Reuters questions about growth prospects, structural weaknesses or reform plans.
Exit
In an article dated July 4 in the official magazine Qiu Zhi, NDRC Director Zheng Xianjie made a rare reference to the middle-income trap, stating that China will “accelerate the construction of a modern industrial system” to avoid it. said there was a need.
Zheng noted that developing countries are struggling to move from middle to high income levels due to rising costs and declining competitiveness.
Economists point to China’s electric car boom as evidence of progress, but many of the country’s industrial parks have not progressed at the same speed. Overseas car sales account for only 1.7% of exports.
“Many observers will look at some companies and say, wow, China can develop such great products, so the future should be bright. Are there any?” said Richard Koo, chief economist at Nomura Research Institute.
Policymakers said they hoped household consumption would drive growth, but did not suggest specific measures.
Huang Olz, China economist at Fathom Consulting, said rising consumer demand could divert resources away from supporting manufacturing exporters, which explains some of the reluctance to make such reforms. said.
“I don’t think the authorities will commit to that path,” said Mr. Oltz, who said it was “a way out” of the economic downturn.
Rather, China has taken the opposite measure.
President Xi Jinping has advocated “co-prosperity” against inequality and has encouraged pay cuts in the financial and other sectors. The deterioration of the city’s finances prompted a reduction in the salaries of civil servants, accelerating the deflationary spiral.
A manager at a Beijing-based bank, Mr. Zhao feels he will never be wealthy with his salary staying the same despite several promotions. She said she plans to retire in her 40s and live in a smaller, cheaper city instead of working hard.
“We missed the golden age of banking,” Zhao said, speaking on condition of partial anonymity because he is not authorized to speak to the media.
Many economists call for better public health care, higher pensions and unemployment benefits, and other components of the social safety net to give consumers the confidence to save less.
Central bank adviser Tsai Fang earlier this month called for stimulus measures to stimulate consumption, including changes to China’s residence permits, which deny millions of rural migrants access to public services in the cities where they work. .
Zhu Ning, deputy director of the Shanghai Institute of Advanced Finance, said an improvement in social welfare could make the 3-4 percent growth rate more sustainable.
‘last chance’
Ku says China’s problems are even more difficult than Japan’s a generation ago, and that policymakers have room for error as they seize the “last chance” to reach the living standards of the developed world. Stated.
In his assessment, China is in a “balance sheet recession,” with consumers and businesses repaying debt instead of borrowing or investing.
He said this was the beginning of a recession and the only cure was a “quick, significant and sustained” fiscal stimulus, which he did not expect to happen anytime soon given China’s debt concerns. was not
He added that stimulus must be productive and complemented by changes that allow the private sector to move out of the shadow of the state, such as through improved relations with foreign investment source countries. .
But China will have to change course.
Infrastructure investment in recent years has created more debt than growth.
Beijing remains embroiled in a contentious trade war over metals used in semiconductors as major economies seek to reduce their dependence on China.
“Every time the U.S. announces some anti-China policy, the Chinese government comes up with a similar policy. But Americans aren’t in the middle-income trap. China is,” Mr. Ku said.
“If the Chinese don’t achieve the Chinese Dream, there are probably 1.4 billion not-so-happy people out there, and that could be pretty precarious.”
Liangping Gao, Ellen Zhang, Ziyi Tang, Kevin Yao and Joe Cash report in Beijing. By Marius Zaharia. Edited by David Crawshaw.
Our criteria: Thomson Reuters Trust Principles.
