China’s rise is reversing

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The author is chairman of Rockefeller International

In a historic twist, China’s rise to economic power is being reversed. The biggest global story of the last half century may be over.

After stagnating under Mao Zedong in the 1960s and 70s, China opened up to the world in the 1980s — and took off in subsequent decades. Its share of the global economy has grown nearly tenfold from below 2 percent in 1990 to 18.4 percent in 2021. No country has ever risen so fast.

Then the twist began. In 2022, China’s share of the global economy shrank slightly. This year it will drop to 17 percent. The two-year decline of 1.4 percent was the largest since the 1960s.

These numbers are in „nominal” dollar terms — unadjusted for inflation — and are the most accurate measure of a country’s economic strength. China aims to regain its imperial status from the 16th to early 19th centuries, when it accounted for one-third of world economic output, but may not be able to achieve that goal.

China’s collapse could reshape the world. Since the 1990s, the country’s share of global GDP has grown mainly at the expense of Europe and Japan, with the last two years seeing their shares more or less stable. The gap left by China has mainly been filled by the US and other emerging countries.

To put this into perspective, the global economy is expected to grow by $8tn to $105tn in 2022 and 2023. China accounts for almost none of that gain, the U.S. accounts for 45 percent, and other emerging countries account for 50 percent. Only five countries — India, Indonesia, Mexico, Brazil and Poland — account for half of the gains. This is a significant sign of power changes to come.

Also, China’s slipping share of world GDP in nominal terms is not based on independent or foreign sources. Nominal figures are published as part of their official GDP data. So China’s rise is reversed by Beijing’s own reckoning.

One reason it has been largely overlooked is that most analysts focus on real GDP growth, which adjusts for inflation. By creatively adjusting for inflation, Beijing has long been able to report that real growth is reaching its official target, now around 5 percent. This, in turn, corroborates the official narrative that „the East rises” every quarter. But China’s real long-term potential growth rate — the sum of new workers entering the labor force and output per worker — is now 2.5 percent.

China’s ongoing baby boom has already reduced its share of the world’s working-age population from 24 percent to 19 percent, and is expected to drop to 10 percent over the next 35 years. A smaller share of growth is almost certain as the share of the global workforce shrinks.

Also, over the past decade, China’s government has grown more bloated, and its debts are historically high for a developing country. These forces reduce growth in productivity, measured as output per worker. This combination — fewer workers and anemic growth in output per worker — will make it difficult for China to begin winning back a share of the global economy.

In nominal dollar terms, China’s GDP is on track to decline in 2023, for the first time since the big devaluation of the renminbi in 1994. Given the constraints on real GDP growth, Beijing could regain global share in the coming years. Inflation or the value of the renminbi – but neither is likely. China is one of the few economies affected by deflation and is facing debt-induced asset erosion, which usually leads to a devaluation of the local currency.

Investors are pulling money out of China at a record pace, adding pressure on the renminbi. Foreigners cut investment in Chinese factories and other projects by $12bn in the third quarter – the first such drop since records began. Even before the foreigners arrive, the locals, who often leave the troubled market, leave. Chinese investors are making outward investments at an extraordinary pace, scouring the globe for real estate deals.

Chinese President Xi Jinping has in the past expressed supreme confidence that history is turning in his country’s favor and that nothing can stop its rise. Joe Biden and his meetings with US chief executives at a summit in San Francisco last week signaled moderation, or at least an acknowledgment that China still needs foreign trading partners. But whatever Xi does, his country’s share of the global economy is likely to decline in the future. It is now a post-China world.