China's economic miracle is over
A guide to what comes next
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The business and financial press is currently full of stories about the end of China’s economic miracle. After producing decades of sky-high growth rates, the country’s economic model seems to have come to the end of its road. Growth is slowing, local governments are weighed under by unsustainable debt, and investment opportunities seem to be drying up. By some predictions, China’s economic growth will slow to a thoroughly normal 2% by 2030, which if true means that it will likely never overtake the U.S. economy in size.
I’ve read as much as I can about the Chinese economy over the years, but I’m neither a China specialist nor an economist. That said, the story seems to go something like this: For decades, China’s economic model was predicated on the government forcing households to save at artificially high levels, then investing the resultant capital into whatever low-hanging fruit was available. Back when China was a very poor country, there were many opportunities to invest in infrastructure and achieve a sugar-rush of quick growth. Some of this investment helped China to develop the export industries which have allowed it to become the world’s workshop. But over the years there were limited returns to be made by building another bridge, another factory, another new million units of apartment buildings. The government didn’t just build but overbuilt. The result is an economy with many useless assets, a lot of unsustainable debt, and fewer and fewer low-hanging investment opportunities.
This new reality will force many people to adjust their view of the world. “The rise of China” has been not just a common trope for over a decade, but also an article of faith. Books with titles like When China Rules the World used to be bestsellers, and I’ve spoken to many students (and teachers!) over the years who believed that it was an inevitability that China would eventually eclipse the United States and emerge as the world’s dominant hyperpower.
I’ve always believed that reality was going to be much more messy. Anyone familiar with the details of China’s growth model could always tell that it was unsustainable. That didn’t mean that Beijing wouldn’t be able to transition to another one, but it did mean that simply projecting China’s current growth rate into the future was never a reliable way of predicting what was going to happen. On the other hand, this doesn’t mean that China or the Chinese Communist Party are doomed. Even at a much lower level of growth, China will remain a major power in world affairs, and U.S.-China competition is likely to define the geopolitics of the coming decades. China doesn’t need to rule the world to still be important.
To say that what comes next will be messy is to say that no simple story can serve to explain it. “The rise of China” was just such a story, and it led many of its proponents astray. Instead, below, I offer four points which contribute to understanding this complex new era, while also acknowledging that much about it remains to be written.
U.S. hostility to China will adapt but remain
A visitor from Mars, unfamiliar with Earth geopolitics or the history of the United States, might be forgiven for thinking that the end of China’s economic miracle means that U.S.-China hostility will abate. After all, if China has no realistic prospect of making a bid to “rule the world”, shouldn’t the U.S. stop treating it as a systemic rival?
This is highly unlikely to happen, for a number of reasons, not least because American rhetoric towards China is highly adaptable. In fact, Washington’s hostility has already pivoted away from the idea that “China’s rise is inevitable” and towards emphasizing that China poses a threat to the United States precisely because it is weaker than it was once believed to be. Here is a quote from Biden’s 2022 National Security Strategy:
Our rivals’ challenges are profound and mounting. Their problems, at both home and abroad, are associated with the pathologies inherent in highly personalized autocracies and are less easily remedied than ours. Conversely, the United States has a tradition of transforming both domestic and foreign challenges into opportunities to spur reform and rejuvenation at home. [Italics mine - AG]
Biden expanded on this theme recently when he stated that China’s economy was “in trouble” and that this made the country a “ticking time bomb” because “when bad folks have problems, they do bad things”. This idea - that China might lash out in its foreign policy in order to distract from its problems at home - has now become commonplace in American commentary. It suggests that American views on China will adapt to the new reality of lower Chinese growth while continuing to portray the country as the United States’ main rival.
China will still remain - and become more - powerful
The reason for this is simple - despite its economic woes, China remains a country with significant power, and Washington believes that it intends to use that power to pose a fundamental challenge to America’s vision of international order. China doesn’t need to overtake the American economy in size to maintain and even grow these instruments of power, including its rapidly growing nuclear arsenal and a military which many experts believe will be capable of seizing Taiwan this decade.
It’s much more useful, though, to think about how these assets might be used within specific contexts than to get carried away with the idea that China might one day rule the world. And the specific context that is worth focusing on - particularly in a world in which China’s growth model is broken - is the region, not the globe. Even without becoming a globe-spanning hyperpower, China will remain by far the most powerful country in East Asia. Any conflict between America and China is not going to take place off the coast of California, but somewhere much closer to China’s shores. And that gives Beijing distinct advantages.
Over the previous decades, China’s military has been focused on developing the ability to target and destroy American ships and planes in an ever-widening envelope around China’s shores. The goal seems to be to make it impossible or ruinously expensive for the U.S. military to operate close to China’s shores, meaning that in the event of a regional crisis over Taiwan or the South China Sea, Beijing could force America back and operate with a freer hand. According to who you ask, China already has - or will soon have - the capabilities to give this strategy a serious shot.
The American military’s plans for dealing with this scenario vary from retreating to a blockade through to extensive military strikes on the Chinese homeland. In a worst-case scenario involving the invasion of Taiwan, the U.S. Navy and Air Force might suffer horrific losses, leaving Washington feeling that only nuclear weapons can stop China. And that’s not a scenario I’ve invented - it’s the basis of a novel written by Admiral James Stavridis, who retired as one of the top-ranking officers in the U.S. Navy.
China could change in a way that’s good for the world
But even if China doesn’t need to rule the world in order to lead it to disaster, none of this is inevitable. And the country’s slowing economy provides an opportunity - if the Communist Party will take it - to turn things around.
Many Western economists believe that China’s best shot is to transition to a model that looks more like the West. They argue that rather than forcing the population to save in order to build infrastructure and prop up export industries, Beijing needs to shift the focus of its economy to domestic consumption. Most people in Western economies are employed providing one another services in the domestic market, and by boosting the purchasing power of its own population, China could emulate this and produce more sustainable growth. This would mean allocating resources away from investment and towards consumption, which would also improve the standard of living of the average person in China.
The first benefit of this evolution is that it could mend some of the economic imbalances which have strained relations between China and the West. A China which is less focused on producing manufactured products would be exporting less to the West, reducing tensions around the decline of America’s manufacturing base. If the Chinese people have more money to spend, they would likely spend some of it on imports, further boosting Western producers.
A second benefit would be that if Beijing is allocating more resources to its domestic market, it would have fewer resources available for an aggressive foreign policy. Boosting the spending power of Chinese consumers would likely require transfer and welfare payments to make the population richer, which would mean less money for the military. Economic disruptions - such as those that might be caused by a war over Taiwan - might require sacrifices from the population which they are unwilling to make once they are used to a higher level of consumption.
On the other hand, we can’t assume that Beijing will follow the advice of Western economists. When Xi Jinping came to power a decade ago, many foreign observers of China believed that he might make it his mission to reorient the Chinese economy in precisely this way, and they were bitterly disappointed. But China’s mounting woes are likely to force some kind of course correction soon, and some of the ways that China’s economy might evolve could actually be beneficial. What exactly will happen is one of the big unknowns that will define the coming era.
Things will change - again
My fourth point is probably the most important. Just as it was a mistake to look at China’s growth in 2010 and project it forward for the next 30 years, so is it a mistake to look at the situation in China now and assume things will never get better.
Consider the U.S. during the Great Depression. In the early 1930s, not just the American economic model but the American political model looked broken. An economic crisis which largely originated in the United States swept the globe, and the U.S. seemed utterly unable to cope. For all of the myths of Franklin D. Roosevelt’s heroic first hundred days in office, the American economy didn’t return to healthy levels of growth throughout the entire 1930s. Faith in American democracy was so low that the fascist governments of Europe had genuine appeal to millions of Americans, and many wondered if capitalist democracy would ever recover. The American political mainstream was isolationist, indifferent or hostile to the idea that America should be a world-spanning superpower.
Fast forward 15 years and the situation was utterly changed. America bestrode the world like a colossus. Democratic capitalism was on the march and would remain. At the end of World War II, 50% of the world’s entire manufacturing capacity lay inside the borders of the United States, and the country was becoming the superpower we know today.
Absent a war which devastates Europe and the North American continent, it is highly unlikely that China will follow the same trajectory. Nevertheless, we must remember that things can change fast. The America of the Great Depression still possessed tremendous latent power, as World War II showed, and unpredictable global events still had the power to transform international politics. China’s ambitions today may be more regional than global, but its ability to pursue them will depend to a great deal on what happens elsewhere in the world - particularly in the United States itself. If the U.S. keeps shooting itself in the foot by electing candidates like Donald Trump or finally careens into a self-inflicted economic crisis over government spending or the debt ceiling, the possibilities open to China’s rulers will shift. The future is not going to be wholly “Made in China”, as many once thought - but we can’t write Beijing out of the story either.