The idea of China overtaking the United States as the world’s largest economy has been an obsession for policymakers and economists for decades. What would happen, they ask, if one of the most dynamic and productive economies, the United States, were to be taken over by an authoritarian regime with a workforce of 750 million people?
Predictions of when China will dethrone the United States have been circulating since the 2008-2009 financial crisis that stunted growth in the United States and Europe for many years. Before what became known as the Great Recession, China recorded double-digit annual gross domestic product (GDP) growth for at least five years. In the decade following the crisis, the Chinese economy still grew at 6% to 9% per year. That is, until COVID-19 hit.
As if the pandemic wasn’t enough, forcing strict lockdown measures and collapsing the economy, the Asian giant also suffered a collapse in its real estate market, which at its peak accounted for a third of China’s economy. But rules introduced by Beijing in 2020 limited the amount of debt developers could take on. Many companies went bankrupt, leaving an estimated 20 million unfinished or delayed homes unsold.
Around the same time, deteriorating trade relations with the West also weakened the growth of the world’s second-largest economy. After encouraging China’s rise for decades, by the late 2010s the United States had shifted to curbing Beijing’s economic and military ambitions, even if only to slow China’s inevitable advance.
Has China’s economy peaked?
An apparent change in the fortunes of the Chinese economy led to the coining of a new term, “Peak China,” about a year ago. The theory is that the Chinese economy now faces a host of structural problems, including high debt, declining productivity, sluggish consumption, and an aging population. These weaknesses, plus geopolitical tensions over Taiwan and trade decoupling by the West, have led to widespread speculation that China’s imminent economic hegemony may be delayed or never materialize.
But Wang Wen of the Chongyang Institute of Financial Studies at Renmin University of China told DW that the notion of Peak China is a “myth” and that China’s total economic output in 2021 reached almost 80% of that of the United States.
Wang said China’s economy will soon overtake that of the U.S. as long as Beijing maintains “internal stability and external peace.” He cited millions of rural Chinese wanting to move to cities where incomes and quality of life are said to be much higher.
“China’s urbanization rate is only 65 percent. If we calculate that to be 80 percent in the future, that would mean an additional 200 to 300 million people moving into cities, bringing about a significant increase in the real economy,” he said.
Productivity growth has ‘disappeared’
But other economists believe the problems that gave rise to the “Peak China” narrative have probably been building for years.
“The reason the Chinese economy grew so fast in the early 2000s was because productivity was high,” Lauren Brandt, an economics professor at the University of Toronto, told DW, adding that around 70 percent of China’s GDP growth in the first three decades of its reform and opening-up policy, which began in 1978, was due to productivity.
“Productivity growth has disappeared since the financial crisis and is now at about a quarter of what it was before 2008,” the Chinese economic expert added.
As the Chinese Communist Party prepares for its most important meeting of the year, the country faces a number of short-term economic headwinds.
China’s total debt has grown to more than 300% of GDP, most of it held by local governments. Foreign direct investment has fallen for 12 consecutive months, falling 28.2% in the first five months of 2024 alone. Despite huge investments in expanding production of new technologies, some of Beijing’s trading partners are restricting imports from China.
“We have an economy here with huge investments. [research and development]”The US has great talent and first-rate infrastructure, but it’s not being used in a way that leads to sustained economic growth,” Brandt told DW.
Unintended Consequences of Xi Jinping’s Power Grab
Beijing under President Xi Jinping is also centralizing the economy through nationalization of industry. China’s leaders have decided that the next wave of growth will be based on domestic consumption and less reliance on foreign exports.
But many social security systems have not kept up with China’s economic miracle. Consumers who can no longer rely on low-cost health care, education and basic state pensions are becoming wary of spending more of their savings. They have seen their household wealth fall by as much as 30 percent as a result of the property price collapse, Brandt said.
“[Decentralization] “For the first 20 to 30 years, they gave local governments the power to make decisions,” she added. “China has benefited greatly from the autonomy, freedoms and incentives that local governments had, and from a very dynamic private sector. These issues are going to be much harder to reverse, especially under the current leadership.”
In the late 2000s, the private sector accounted for nearly two-thirds of China’s economy; by early last year, that share had fallen to 40 percent. The state- and mixed-ownership sectors have become much larger. China now has more companies than any other country on Fortune’s list of the world’s largest companies, but these companies are less profitable than their U.S. counterparts, with an average profit margin of 4.4 percent compared with 11.3 percent for U.S. multinationals.
Is China the New Japan?
A big concern is that all these factors could lead the Chinese economy to follow the same path as Japan, which after World War II experienced an economic miracle marked by decades of high growth and massive stock market and real estate bubbles.
At its peak, some economists predicted Japan would overtake the United States to become the world’s largest economy. But the bubble burst in 1992, wiped out fortunes and sent the economy into a tailspin, and Japan has been unable to make up for lost growth in the decades since.
Meanwhile, Chinese economists point out that the country’s industrial GDP is already twice the size of the U.S.’s. Last year, its GDP grew 5.2 percent, more than double the U.S. rate. Measured in purchasing power parity (PPP), the Asian nation already surpassed the U.S. in 2016.
“Over the past 45 years, China’s development has faced many economic problems,” Wang told DW, “but compared with the Great Depression 30 years ago, the huge debts 20 years ago, and the housing market collapse 10 years ago, the current problems are much less serious.”
Editor: Ashutosh Pandey
