China’s slowing growth is a recipe for global instability

The US wants to weaken China’s economy so that it can never compete on equal terms. Washington’s announcement on semiconductor export controls last week can hardly be interpreted otherwise. The goal may be military rather than economic superiority, but globalization as we have known it for the past 30 years is clearly at an end. But this is only the second most important event for China’s long-term growth trajectory this month.

Most important is what will happen in a few days, when Xi Jinping steps out at the Chinese Communist Party’s National Congress to recognize what will almost certainly be a third term as its supreme leader. Xi is in office for another five years and is expected to continue China’s move away from liberalization and market forces towards statism and authoritarian rule. The US may struggle to keep China’s economy grounded, but in this cycle of hostility, Beijing is well on its way to paralyzing itself.

Such shifts in the internal and external environment for Chinese growth are affecting the answer to the biggest economic and geopolitical question of the 21 Japanese? If so, then a simple fact comes into play. With four times the population of the US, China’s economy could grow four times, in which case it would dominate the world – certainly economically and most likely politically and militarily as well.

The obstacles to China’s development now make another path more likely. That’s a future in which China is still growing and still becoming the world’s largest economy, but remains well below US income levels. That would be a world of two competing superpowers. The danger is that such close competition could be even less stable geopolitically than an inexorable rise to Chinese dominance.

The case for slower Chinese growth was plausibly presented in a report by Roland Rajah and Alyssa Leng of the Lowy Institute earlier this year. With future population declines dictated by decades of one-child policies and falling returns from building more housing and infrastructure, China’s future growth depends on higher levels of productivity.

However, Rajah and Leng argue that China has outpaced countries like Japan and South Korea at similar stages in their development; and that the country is struggling with the next round of reforms it needs to keep boosting productivity, such as B. the development of a modern financial system that allocates capital efficiently, or the reform of the “hukou” Household Registration System. Unlike its East Asian neighbors, Beijing now has to contend with open US hostility to its attempts to move up the value chain.

It’s entirely possible that the optimists about China’s growth are right, that Beijing will change course and enact the reforms it needs to sustain growth, and that the country will be able to independently develop any technology that the US denies them. But even if China does have some success with reforms, Rajah and Leng pessimistically argue that overall growth will slow from 6 percent before the Covid-19 pandemic to around 3 percent by 2030 and 2 percent by 2040.

That creates a very different geopolitical future. China would still overtake the US in the next decade or two, but its economy would only grow about 50 percent at purchasing power par, which is price-adjusted, and 15 percent at market exchange rates.

The consequences of this are not reassuring for global stability. China’s demographics will increasingly weigh on its growth, while the US is more open to immigration. The Lowy Institute therefore predicts that after 2040 the US will start to overtake China. That means China will reach a moment of peak economic strength relative to the US sometime in the 2030s. If Chinese politicians believe this to be the case, then instead of having time on their side when it comes to rewriting the world order, they may see a limited window of opportunity to act.

Beijing will also, quite rightly, perceive an effort by the world’s economic superpower to hold China down and keep it relatively poor. That will foster resentment. The world’s largest economy, with a finite window of strength and reasons to begrudge the established order: that sounds like a recipe for instability. Perhaps the only thing as frightening as the galloping growth in China’s economy is the opposite.

robin.harding@ft.com