Few questions are more consequential, whether it’s for executives wondering where long-term profits will come from, investors weighing the dollar’s status as global reserve currency, or generals strategizing over geopolitical flashpoints.
In
Beijing, where they’ve just been celebrating the 100th anniversary of the
Chinese Communist Party, leaders are doing their best to present the
baton-change as imminent and inevitable. “The Chinese nation,” President Xi
Jinping said last week, “is marching towards a great rejuvenation at an
unstoppable pace.”
Early in
the Covid-19 crisis, when China managed to control infections and maintain
growth even as the U.S. suffered hundreds of thousands of deaths and a
crunching recession, many were inclined to agree. More recently, an
unexpectedly fast U.S. recovery has illustrated just how much uncertainty
remains around the timing of the transition—and even whether it will happen at
all.
If Xi
delivers on growth-boosting reforms, and his U.S. counterpart President Joe
Biden is unable to push through his proposals for renewing infrastructure and
expanding the workforce, forecasts from Bloomberg Economics suggest China could
grab the top spot—held by the U.S. for well over a century—as soon as 2031.
But that
outcome is far from guaranteed. China’s reform agenda is already languishing,
tariffs and other trade curbs are disrupting access to global markets and
advanced technologies, and Covid stimulus has lifted debt to record levels.
The
nightmare scenario for Xi is that China could follow the same trajectory as
Japan, also touted as a potential challenger to the U.S. before it crashed
three decades ago. A combination of reform failure, international isolation and
financial crisis could halt China before it reaches the top.
Another
possibility—enticing to the skeptics—if China’s official GDP data is
exaggerated, the gap between the world’s biggest and second biggest economies
may be larger than it appears, and closing at a slower pace.
Throughout
this report, we refer to the nominal dollar level of GDP—widely viewed as the
best measure of economic strength. On the alternative purchasing power parity
measure—which takes account of differences in cost of living and is often used
to measure quality of life—China has already claimed the top spot.
Over the
long haul, three factors determine an economy’s growth rate. The first is the
size of the workforce. The second is the capital stock—everything from
factories to transport infrastructure to communication networks. Finally
there’s productivity, or how effectively those first two can be combined.
In each
of these areas, China faces an uncertain future.
Start
with the workforce. The math is straightforward—more workers means more growth,
and fewer workers means less. Here lies China’s first challenge. Low
fertility—the legacy of the one-child policy—means that China’s working-age
population has already peaked. If fertility stays low, it’s projected to shrink
by more than 260 million over the coming three decades, a drop of 28%.
Aware of
the risks, China has changed course. Controls on fertility have been relaxed.
In 2016, the limit was raised to two children. This year, the government
announced that three were allowed. Meanwhile, plans to increase the retirement
age could keep older workers in their jobs for longer.
Even if
reforms succeed, it will be hard for China to offset the impact of the
demographic drag. And they might not succeed. Rules aren’t the only thing
holding families back from having more children: there’s also the high cost of
things like housing and education. “The reason I haven’t bought three Rolls
Royces is not because the government wouldn’t let me,” wrote one netizen in
response to the three-child news.
The
outlook for capital spending isn’t quite so bleak—no-one expects the number of
railroads, factory robots or 5G towers to shrink. But after years of breakneck
growth in investment, there are plenty of signs that it now brings diminishing
returns. Overcapacity in industry, ghost towns of empty buildings, and six-lane
highways snaking into sparsely populated farmland all illustrate the problem.
With the
labor force set to shrink, and capital spending already overdone, it’s
productivity that holds the key to China’s future growth. Boosting it, most
Western economists think, requires action such as abolishing the creaking hukou
system (which ties workers to their place of birth), leveling the playing field
between state-owned giants and nimble entrepreneurs, and reducing barriers to
foreign participation in the economy and financial system.
Beijing’s
industrial planners have their own blueprint—and China has a long track record
of successful growth-enhancing reforms. With China only about 50% as efficient
as the U.S. in how it combines labor and capital, there’s still lots of room to
improve.
By 2050,
Bloomberg Economics projects China’s productivity will have caught up to 70% of
the U.S. level—putting it in the typical range for countries at a comparable
level of development.
Will
China be able to deliver on the promise—boosting growth not with more workers
and never-ending investment, but with smarter workers and more advanced
technology? Unfortunately for Beijing—and in contrast to the elaborately
choreographed celebrations for the 100th anniversary of the Communist Party—not
all the determinants of future growth are under their control.
Global ties
are starting to fray. A recent Pew survey found 76% of Americans had an
unfavorable opinion of China—a record high. They aren’t alone. The blame game
over the origins of Covid, mounting concern about human rights in Xinjiang, and
Hong Kong’s draconian National Security Law have all helped to darken the
global view of China’s rise.
If ties
with the U.S. and its allies continue to fray, the cross-border flow of ideas
and innovations that has done so much to accelerate China’s rise will start to
dry up. Beijing is already getting a sneak peak at what that might look like.
Europe is backing away from a major investment agreement, and India closing the
door to Chinese technology.
An
elaborate exercise by economists at the International Monetary Fund found that
in an extreme scenario, with China and the U.S. dividing the world into
separate spheres of influence, China’s 2030 GDP could take an 8% hit—relative
to a base case where ties stay stable.
A
combination of stalling domestic reforms and international isolation could
bring another extreme scenario into play: financial crisis.
Since
2008, China’s credit-to-GDP ratio has rocketed from 140% to 290%—with the Covid
stimulus contributing the latest leg up. In other countries, such a rapid
increase in borrowing has heralded trouble ahead.
Drawing
on Carmen Reinhart and Kenneth Rogoff’s study of financial crises, Bloomberg
Economics estimates that a Lehman-style meltdown could push China into a deep
recession followed by a lost decade of close to zero growth.
There
are also widespread doubts about the reliability of China’s official growth
numbers. The country’s own leaders have acknowledged the problem. GDP data is
“man-made,” current Premier Li Keqiang said when he was the head of Liaoning
province. For a more reliable read, he preferred to look at the numbers for
things like electricity output, rail freight and bank loans.
A study
by economists at the Chinese University of Hong Kong and University of Chicago
suggested that between 2010 and 2016, China’s “true” GDP growth was about 1.8
percentage points below what the official data suggested. If China is in fact
already on a slower growth path, overtaking the U.S. becomes harder.
Not on
Biden’s Watch
“That’s
not going to happen on my watch,” Biden said when he was asked about China’s
ambition to take the global top spot. “Because the United States is going to
continue to grow.”
For the
U.S., as for China, the path to faster growth lies through expanding the
workforce, upgrading the capital stock and innovating on technology. Biden’s
infrastructure and family plans represent trillion-dollar down-payments on
doing just that. By lifting U.S. growth onto a faster track, they could delay
China’s ascendency.
Drawing
all these strands together, Bloomberg Economics has constructed scenarios for
the outcome of the U.S.–China economic race.
If
everything goes right for China—from domestic reforms to international
relations – then it could start the next decade neck-and-neck with the U.S.—and
then accelerate into the distance.
It’s in
Xi’s interest for the world to see that as the inevitable path. If political
leaders, business executives and investment managers are convinced China is
poised for pre-eminence, they have a strong incentive to get on the
bandwagon—turning Beijing’s prophecy of success into a self-fulfilling one.
And Xi
has the logic of development on his side. China’s 1.4 billion population is
four times larger than that of the U.S. GDP per capita is currently less than
20% of the level in the U.S. It would only have to converge a little more for
China to claim the top spot. China’s past development success, as well as that
of Asian neighbors Japan and South Korea, suggest that shouldn’t be too tall an
order.
But as
the checkered history of the China’s last hundred years shows, development is
not pre-destined. At the 100-year anniversary the focus— understandably—is on
the successes of the last forty years. In the earlier decades, the Party’s
record on delivering growth was—to say the least—much less impressive. As Xi
casts off the constraint of term limits and prepares for a third term as
President, some fear a return of the leadership dysfunctions that blighted the
earlier period of Communist rule.
If
doubts start to creep in, another path is possible. Stalled reforms, fraying
global ties, shrinking workforce and financial crisis could keep China
indefinitely in second place.
Methodology
Bloomberg
Economics has forecast potential growth rates for China and the U.S. using a
standard growth accounting framework, adding up the contributions of labor,
capital, and total factor productivity. Within that framework, we explore base
case, upside, and downside scenarios for China taking account of a number of
factors:
China’s
reforms. In our base case we assume China’s total factor productivity will rise
from about 50% of the level in the U.S. today to about 70% in 2050. In our
upside scenario, TFP rises to 85% of the level in the U.S. In the downside
scenario it only reaches 55%. Decoupling. We model the impact of decoupling
based on the relationship between globalization, bilateral trade linkages, and
productivity. Our base case assumes China loses 5% of the gains from
globalization – equivalent to a partial breakdown in U.S. ties. Our downside
scenario assumes China loses 13% - equivalent to breaking all ties with the
U.S. In our upside scenario, ties with the U.S. remain intact. Fertility. In
our base case and downside scenario, we assume the U.N.’s low fertility
trajectory (about 1.25 births per woman). Our upside scenario assumes the
U.N.’s medium fertility path (about 1.75 births). Pension age. China’s legal
retirement age is expected to be raised to 65 (from 60) for men and to 60-65
(from 50-55) for women. The base case assumes a phased lifting, ending in 2030.
The upside scenario assumes the change is completed by 2025. In the downside
scenario, it’s completed in 2040.
In
addition, we explore two more extreme scenarios:
Financial
crisis. We layer a 2030 financial crisis on top of our downside scenario -
drawing on estimates of the impact on growth from Reinhart and Rogoff’s study.
Data exaggeration. Drawing on a 2019 study by academics at the Chinese
University of Hong Kong and University of Chicago, we assume China’s official
growth rate has been overstated by about 1.8 ppt since 2010, and that potential
growth has moved onto a correspondingly slower path.
For the
U.S., in addition to our base case, we identify an upside scenario where
increase in immigration, infrastructure spending, and innovation shift the
economy onto a slightly faster growth path.
https://www.yahoo.com/now/china-rule-world-maybe-never-210013340.html