In the past several decades, China has transformed itself from a developing, agrarian society to an industrialized economic juggernaut. However, China is currently facing a multitude of problems: demographic pressure, a large accumulation of debt, high youth unemployment, an unfavorable geopolitical climate, a breakdown of the property sector, rising inequality, a bank crisis, and slowing productivity growth. The emergence of COVID-19 as a key determinant of policy choices further exacerbates these troubles. While China’s rapid growth and manufacturing prowess brought it economic prestige, the troubles shown in China’s current position threaten to stunt its economic growth, begging the question: Has China’s economy reached its peak?

How China Became an Economic Powerhouse

A decade ago, Xi Jinping had just ascended to power in the world’s most populous country. China had just overtaken Japan to become the world’s second largest economy. Since 2012, China’s average annual growth rate has held around 6.7%–one of the fastest sustained expansions for a major economy in world history. In 2021, China’s Gross Domestic Product (GDP) reached $18 trillion, comprising 19.4% of global output, per the World Bank. China’s rapid technological advancement has made it a strategic threat to the United States and its allies. Chinese technology firms have pushed American rivals out of leadership positions in numerous sectors from 5G to artificial intelligence. Economists have long predicted that China would overtake the United States to become the world’s largest economy by 2030. China has experienced a dramatic and prolonged expansion. However, China’s future appears less certain, having been muddied by an array of factors. The Director of China Initiatives at Arizona State University Doug Guthrie explains, “For 30 years, China was on a path that gave people great hope, [...] [China] is in deep trouble right now” (He 2022). For the first several years of his rule, Xi Jinping had embarked on a path that capitalized on the entrepreneurial momentum and rapid development of private enterprises that his predecessors had set in motion. However, several of Xi’s recent policies threaten to reverse China’s progress, headlined by a crackdown on the private sector to extend lockdowns under “Zero COVID”–a policy approach that aims to halt the transmission of COVID-19 by any possible means. Professor Sonja Opper of Bocconi University argues, “If anything, Xi’s leadership may have dampened some of the country’s growth dynamic” (He 2022).

China’s Problems

China’s economy faces a number of challenges to growth. In 2022, in the midst of a harsh Zero COVID policy, China posted its second worst growth rate since 1976, at only 3% (Xie, Douglas, and Wei 2023). 2022 growth was only better than that of 2020 and represented a sharp downturn from 2021’s 8.1% rate of growth (He 2022). The Chinese central leadership, in turn, is likely to announce a growth rate target between 5% and 5.5% for 2023 (Xie, Douglas, and Wei 2023). 

China is now facing a shrinking population for the first time since 1961. In 2022, the population had dropped by 850,000, arriving sooner than the Chinese government had predicted. This population dip has significant repercussions for the Chinese economy and its status as the world’s manufacturing capital and makes the task of overtaking the U.S. much more difficult. Lead economist at the Lowy Institute Roland Rajah notes, “The likelihood of China someday overtaking the U.S. as No. 1 economy has just gone down a notch” (Xie, Douglas, and Wei 2023). A shrinking population leads to a smaller workforce, which restrains economic growth; an economy can only grow by adding workers or producing more with the workers it currently has. However, China’s working age population peaked around 2014 and is expected to fall by 0.2% a year until 2030 according to the S&P Global Ratings. China’s shrinking and rapidly aging population poses a significant problem for its economic outlook. Deputy Chief Economist at Fathom Consulting observes, “It seems like [China] is going to get old before it gets rich” (Xie, Douglas, and Wei 2023). 

In addition to demographic troubles, China is also experiencing numerous structural issues that hinder its growth potential. Productivity growth in the country is slowing, dropping to an average of 1.3% between 2009 to 2019. That represents a sharp decrease from the 2.7% growth of the prior decade. Similarly, China’s debt poses a huge obstacle to growth. China has long employed a growth strategy that encourages local governments and companies to borrow more to fund investments. However, this approach is unsustainable in the long-run. The overall debt as a share of the GDP reached an all-time high during the pandemic. In June 2022, credit to the nonfinancial sector reached $51.8 trillion, accounting for 295% of GDP. Rising social turmoil also weighs on the country’s future economic ascent (Xie, Douglas, and Wei 2023). In July 2022, authorities violently dispersed protests by depositors who demanded their savings from rural banks. These banks had previously frozen millions worth of deposits. The scandal threatened the livelihoods of thousands of Chinese customers and showcased the failing financial health of the country’s smaller banks. China’s financial system is highly vulnerable to financial crises due to the unhindered debt-fuelled expansion (He 2022). 

The country also faces a property sector crisis. In 2022, a collapse in the property sector caused rare dissent among middle class citizens. Thousands of homebuyers refused to pay their mortgages on stalled projects. This resistance by homebuyers fueled an increasing fear of systemic financial risks, thus forcing authorities to put pressure on banks and developers to defuse the unrest. Real estate accounts for nearly 30% of GDP, so an unstable housing market could be financially perilous for China (He 2022). 

China also faces an unfavorable global climate. In 2020, China’s manufacturing sector was operating while every other country was reeling from the COVID-19 pandemic, leading to an export-fuelled recovery. However, now the world economy is struggling, leading to suppressed export demand (Feng 2023). In addition to a flailing global economy, China’s relationship with the West has been seriously diminished. China faces a fraying relationship with the United States for Beijing’s refusal to condemn the invasion of Ukraine, recent aggression toward Taiwan (He 2022), and allegedly flying a spy balloon over American airspace. These external factors place further strain on Chinese exports, another potential problem for China’s economy. 

The Zero COVID Policy

During the COVID-19 pandemic, China, along with many other countries, adopted an approach called “Zero COVID”. Essentially, countries aimed to stop community transmission of COVID-19 immediately once it was detected through contact tracing, social distancing, and lockdowns–no matter the economic repercussions. China continued this approach long after it had been abandoned by other states. This approach proved economically and politically costly as China’s economic centers were shut down  throughout much of 2022. Toward the end of the year, the policy was rolled back following large public protests, but the policy had already restrained growth for most of 2022. Further, China’s pandemic stimulus policies focused largely on the supply-side of the economy rather than the demand-side approach many Western countries took. China refrained from utilizing direct cash payments to households and instead targeted most of its efforts towards supporting manufacturers, causing a slump on the consumer side of the economy (Xie, Douglas, and Wei 2023). 

With the end of Zero COVID, the Chinese government hoped to boost the economy by easing regulations on the property sector and ending its clampdown on the tech sector. During the pandemic, sales growth in the tech sector slumped and thousands of employees lost their jobs, leading to record youth unemployment (He 2022). The jobless rate among people aged 16 to 24 years old stood at 16.7% in December 2022 (Xie, Douglas, and Wei 2023). Chinese tech companies Alibaba and Tencent lost more than $1 trillion in market value during the pandemic (He 2022). 

Widespread sentiment among economists notes that China will likely see some pent-up consumer demand as it emerges from Zero COVID and 2022’s COVID-19 surge. Chinese households increased their savings during the pandemic, so they have more to spend (Feng 2023). Growth in disposable income per capita, however, could slow to around 4% each year in the next five years, a notable decrease from 8% before the pandemic (Xie, Douglas, and Wei 2023). Furthermore, Chinese consumers are very risk-averse and are extremely sensitive to any perception that the government may reverse course on public health policy and economic reopening again (Feng 2023). Oxford University economist George Magnus observes, “the systemic problems that China had in its economy before Covid are still there, [...] In some aspects, the pandemic made them worse” (Xie, Douglas, and Wei 2023). 

Implications for the Future

China’s economic future relies heavily on how it responds to threats to its economy. The fate of China's economic outlook plays a large role in overall global economic growth. At the World Economic Forum in Davos, Xi’s top economic advisor Liu He sought to reassure investors and executives that growth will return to pre-pandemic levels in 2023. Hong Kong Exchanges and Clearing LTD’s Chief Executive Nicholas Aguzin argues that China’s reopening and exit from Zero COVID is the “most positive catalyst” for global markets this year. President and CEO of Asia Society Kevin Rudd adds that if China produces a solid growth number for 2023, around 5% to 5.5%, it will jumpstart global economic growth. The global economy relies heavily on China’s factory workers and manufactured goods, so growth in these sectors is critical for a global economic expansion (Xie, Douglas, and Wei 2023). Analysis by staff at the International Monetary Fund observes that when China’s growth rate rises by 1%, growth in other countries increases by approximately 0.3% (Cerdeiro and Sonali 2023). 

Economists argue that Xi Jinping’s policies have been detrimental to the Chinese economy, exacerbating many of its structural problems. Investors and corporate executives both within and outside of China remain wary of the government’s willingness to remove restrictions on businesses from the pandemic. Economists argue that Xi’s drive for self-sufficiency and tendency to dictate the operations of private businesses will continue to be a drain on the economy. Chief Asia economist at Capital Economics Mark Williams claims, “Xi’s desire to make sure that the [Communist] Party’s control extends across society runs far deeper than his commitment to growing a market economy” (Xie, Douglas, and Wei 2023). Xi believes that many private businesses have become disorderly and too powerful and seeks to rein them in and redistribute wealth across society. Xi also seeks to push consumption and services to become more important drivers of economic expansion than the investments and exports that China has previously focused on. However, Xi’s policies in this realm have pushed the economy into one of the worst crises in forty years (He 2022). Liu hoped to ease investors and executives at Davos by claiming that a “return to a planned economy is impossible” (Xie, Douglas, and Wei 2023). Guthrie notes, “If [Xi] was smart, he would liberalize things quickly in his third term” (He 2022). 

The International Monetary Fund (IMF) has made a number of recommendations for China. Among these recommendations, the IMF supports a neutral fiscal policy with additional monetary policy accommodation to ensure recovery as China faces inflation pressures and below potential growth. In the real estate sector, the IMF recommends an orderly restructuring of troubled property developers. In other realms, the IMF recommends gradually lifting the retirement age to increase the labor supply, strengthening unemployment and health insurance benefits, and reforming state-owned enterprises to close the productivity gap with private firms. According to the IMF’s analysis, these reforms would allow China’s income level to rise around 2.5% over five years (Cerdeiro and Sonali 2023). China could also utilize underemployed urban workers and workers in the countryside to help increase productivity. China continues to add automation and tech to its factories at a rapid pace. These advances in high-tech sectors could help to spur worker productivity. Harris argues these tech advances are “the potential out for China” (Xie, Douglas, and Wei 2023). 

China is at a crossroads. Coming out of the pandemic, China’s economic outlook appears bleak. Faced with a declining population, high levels of debt and youth unemployment, unfavorable external factors, a property sector crisis, rising social inequality, a small bank crisis, and slowing productivity growth–all exacerbated by the COVID-19 pandemic and the Zero COVID policy–China appears to have reached an economic plateau. China can no longer rely on the same strategies that propelled it to become the world’s second largest economy. If China seeks to overtake the United States as the world’s largest economy and return to pre-pandemic levels of growth, it needs to alleviate these problems. Otherwise its economic power may quickly wane as the peak of its economic prestige appears in the rearview mirror. Whether China is able to achieve this feat in 2023 and beyond will be one of key stories to watch in the coming years. 

References

Cerdeiro, Diego A, and Sonali Jain-Chandra. 2023. “China’s Economy Is Rebounding, But 

Reforms Are Still Needed.” International Monetary Fund, February 3, 2023. https://www.imf.org/en/News/Articles/2023/02/02/cf-chinas-economy-is-rebounding-but-reforms-are-still-needed. 

Feng, Emily. 2023. “With COVID Lockdowns Lifted, China Says It's Back in Business. But It's 

Not So Easy.” National Public Radio. NPR, January 30, 2023. https://www.npr.org/2023/01/30/1151375846/china-economy-business-covid. 

He, Laura. 2022. “China’s Economy Is ‘in Deep Trouble’ as Xi Heads for Next Decade in 

Power.” CNN. Cable News Network, October 16, 2022. https://www.cnn.com/2022/10/14/economy/china-party-congress-economy-trouble-xi-intl-hnk/index.html. 

Xie, Stella  Yifan, Jason Douglas, and Lingling Wei. 2023. “China’s Shrinking Population Is 

Deeper Problem Than Slow Growth for Its Economy.” The Wall Street Journal. Dow Jones & Company, January 17, 2023. https://www.wsj.com/articles/chinas-economy-faces-deeper-problems-than-its-slowing-growth-11673963577.