The End of China’s Economic Growth “Miracle” is Looming

By Juuso Kaaresvirta, Bank of Finland institute for emerging economies BOFIT

Chinese economy has grown very rapidly during the past 45 years. Today, China is the second largest economy of the world and its GDP per capita, a rough measure of standard of living, is over 60 times larger than in early 1980. Similar growth “miracles” based on opening up of the economy, reforms and investment boom were experienced in other East Asian economies Japan, South Korea and Taiwan earlier. Like in other East Asian economies, Chinese growth “miracle” is coming to its end.

Last year China’s GDP grew 3 % as the economy was struggling under the pandemic, extremely strict covid policies and collapsing real estate sector. Coming to this year, there were expectations of a major rebound after authorities abandoned covid policies abruptly in December 2022 and the government set halting the real estate contraction as one the policy priorities. However, despite weak comparison year and number of policy support measures by the government in recent months, China will be able to achieve GDP growth of about 5 % in 2023.

In coming years, the GDP growth will be weaker. There is no more rebound effect from a pandemic year and the past drivers of Chinese growth are deteriorating. The population will continue to shrink and age rapidly, while investment driven growth model is troubled by plummeting return on assets and the very high indebtedness of the economy is already causing problems. Moreover, in recent years overall productivity gains have been unimpressive despite major efforts to boost innovation and high-tech production. With economic growth over the medium term dampened by structural factors, we at BOFIT expect in our recent forecast (link) China’s GDP growth to slow to 4 % next year and 3 % in 2025.

Economic reforms have been one the cornerstones of China’s rapid growth. However, during president Xi Jinping’s era major reforms have almost stalled. The government has made marginal progress in recalibrating the economic model, and the role of the state in the economy has been increasing squeezing the private sector’s possibilities to operate. Currently, there are still no signs that the government will embrace the broad-based structural reforms needed to improve growth prospects. The leadership remains focused on promoting self-sufficiency, national security and party ideology – all factors that determine economic policymaking.

Even the possibility for the government to support economic growth are more limited than earlier. Public-sector deficits have been huge in recent years, creating a mountain of public debt. Local governments, which typically are responsible for implementing stimulus measures, are struggling, especially those outside China’s richest provinces. Large pressures to export capital from the country and the yuan’s weak exchange rate are expected to keep the central bank cautious on its monetary policy stimulus measures.

There are numerous risks concerning China’s economy in coming years and most of them are tilted to downside. Will China’s leadership rely on market-based measures when its tries to solve problem areas it recognises? Could we see major a disturbance that shocks China’s domestic financial system? How will Beijing solve the Taiwan issue? How much more tense already-strained relations between China and the west will become? The future is always uncertain, but it is evident that China’s economic growth “miracle” is coming to its end.