Has China’s economy peaked?

As with other economies, China’s development has slowed down as a result of the Covid-19 pandemic, geopolitical conflicts and other factors.

Some Western scholars and research institutions claim that after four decades of growth, China’s rise has peaked and it will never catch up with the United States. 

As a response, Chinese authorities this month released data on the Chinese economy for 2023. Among them, is the annual GDP growth of 5.2%, not only higher than the global growth rate that is expected to hover around 3%, but ranking high among the world’s major economies, outperforming the US and the European Union by a wide margin. 

According to the World Bank’s forecast of the GDP and growth of major economies in 2023, China’s contribution to world economic growth surpasses that of the Americas, Europe and Japan combined, securing its position as the world’s leading economic powerhouse. 

Is China’s economy a risk for the world? Why do some slow-growing or even stagnant economies in the West show their teeth at a faster-growing country instead of minding the perils caused by themselves? 

The “Peak of China’s Rise” theory first appeared in 2021, when two American professors wrote an article declaring that China’s economic rise has peaked under the dual pressure of internal economic slowdown in the past decade and external containment in recent years. 

Since then, Western forums have been peppered by various statements about the assumed peak, including a slowing economy, a vanishing demographic dividend, a technology crackdown by the US and a worsened investment environment.

In the eyes of Western economists, China is grappling with a series of daunting problems: weakening productive force, skyrocketing production costs, dropping returns from investment on infrastructure, an exorbitant debt-to-GDP ratio that is higher than the US, peaked and already-shrinking population and workforce, retreating foreign companies and investors, and lack of innovation resulted from overstretching state-owned enterprises and their under-supported private counterparts. 

For the Chinese people, on the other hand, everything looks familiar. 

The “Peak of China’s Rise” theory is essentially in the same vein as the “China Collapse” theory that has been around for 20 years — a stale steak on a fresh plate. 

As two high-frequency phrases in China-related discourses construed by the West, the two theories recur alternately on the underlying perception that China poses a “threat” to Western countries’ global hegemony. The longer the “threat” persists, the stronger the desire to see it collapse. 

This is also part of the US’s ABC (Anything But China) strategy. So, rather than a miscalculation of facts, the “China Collapse” theory is more of a subjective assumption. As former US president Dwight Eisenhower opined, one dollar spent on propaganda is five dollars spent on defence.

In 2023, China’s actual use of foreign investment recorded a year-on-year decrease, giving pessimists an opportunity to hype up such narratives as “a massive withdrawal of foreign investment from China” and “quitting investment in the Chinese market”. 

Western media sensationalism that China’s focus on safeguarding national security may “deter” foreign investment and “create barriers to capital flows into China”, ignores the enormous base of foreign investment in China and the context of an economic contraction worldwide. 

China’s irreplaceability in the global economy lies not only in its tremendous market, but also in its industrial system, which is the most valued feature for foreign investors. In 2023, foreign investors set up 53 766 foreign-funded enterprises in China, an increase of nearly 40% year-on-year. The proportion of investment in high-tech industries hit a record high of 37%.

Although many emerging and developing countries also offer preferential policies to attract investment, European and American companies set greater store by a stable and a predictable business environment rather than on cost-reducing policies. 

This is precisely where China’s biggest advantage lies in the past 40 plus years since the reform and opening up, and it is where developing countries can draw experience from. 

The most shining instance is Tesla. During operations in the US for more than a decade, Tesla’s highest annual production of electric vehicles was about 30 000. After completing the Shanghai factory in 2019, it delivered 480 000 vehicles in the following year. 

Over the past five years, the return on China’s foreign direct investment has reached 9.1%, much higher than the 3% or so of Europe and the US, and higher than that of major emerging economies. 

Multiple international trade organisations, including the American Chamber of Commerce in China, said that for many foreign companies, the Chinese market is not an “option”, but a “must”. 

As the costs of labour and land are going up and pollution is put under stricter regulation in China, some foreign enterprises adopt the “N+1” strategy to relieve the pressure of rising costs — while maintaining the main production base in China, they set up branches in other countries to diffuse risks. This is market behaviour that shouldn’t be over-interpreted.

Western scholars believe that China’s rapid development in the past three decades is underpinned by its demographic dividend. 

China’s birth rate is falling, which will bring down its economic growth rate. If we look at other parts of the world, we will find an inexplicable phenomenon: many African countries also have huge population resources, why can’t they achieve rapid economic development? 

Labour input is important for economic development, but a more significant factor is the efficiency of labour input, which can be calculated by multiplying the quantity of labour force with their education level. 

In China, for example, most people enter the labour market at the ages of 16 to 25. Their average years of schooling is 13.8, against 10.8 years for the entire working population. 

In stark contrast, the duration of schooling for the 60-year-old retirees averages six. This tells us that the amount of effective labour in China is increasing by year in the process of population ageing. 

In this sense, China’s “demographic dividend” has not disappeared, and “talent dividend” is in the making. 

For the global economy, the uncertainties mainly come from changes in the external world, such as geopolitical conflicts, the policies of the US Federal Reserve and the decline in external demand. Coupled with a shrinking international production investment system as global supply chains are restructured, these are challenges that all countries, including China, are facing. But China has developed its own unique advantages and new engines for economic growth.

What’s next for China’s economic development? A report on 17 January by German weekly economic magazine Wirtschaftswoche predicted that China’s economy will continue to grow at a relatively high rate in 2024. Structural changes in China’s economy, the world’s second largest, are accelerating, it noted. 

Beijing is investing heavily in high technology and innovation in a bid to play a leading role globally in areas such as artificial intelligence, green energy and electric vehicles.

China’s export of high-tech industries and new energy vehicles has exceeded traditional labour-intensive products and become a new engine for its foreign trade growth. For example, its vehicle exports in 2023 have overtaken that of Japan, marking China’s transformation to high-end manufacturing. 

One out of every three cars exported from China is an electric one. The transformation of new energy vehicles from an unfavored industry to China’s most competitive emerging industry has taken place within only a few years. Many people are aware that China’s new energy vehicle production and sales have become the world’s first, but some may not know that China accounts for about a third of the more than $100 billion global investment in key technologies of new energy vehicles in 2022.

The seeds sowed in the spring are bearing fruits. Chinese automobile companies have begun to export in batches electrification and intelligent technology to multinationals. Examples include investment in Chinese EV startups XPeng and Leapmotor from Volkswagen and Stellantis respectively. Rating agency S&P believes that such “reverse” joint ventures in China will increase in 2024. 

China’s enhanced independent innovation capability is promoting international cooperation at a higher level. The World Economic Forum 2024 meeting was convened under the theme “Rebuilding Trust”. This reflects an indisputable fact: intensifying confrontation and lack of trust have become major obstacles to development in today’s world. 

The international community needs more trust and cooperation to better respond to crises and challenges. If Globalisation 1.0 is an era of colonialism and Globalisation 2.0 an era of capital, then Globalisation 3.0 promoted by China is an era of common development. 

China accounts for a third of global economic growth. The benefits of its sustained growth can be felt in every corner of the world. 

The New York Times wrote: “If China continues to chug along, it could portend a sustained recovery for the United States and other nations now bouncing back from their pandemic lows. If its economy further slows, it could drag down the rest of the global economy”.  

To the question “which country will be the next China?”, the answer is clear. The “next China” will still be China, only in its better version.  

Dr Imran Khalid is a freelance columnist on international affairs based in Karachi, Pakistan. He qualified as a physician from Dow Medical University in 1991 and has a master’s degree in international relations from Karachi University.