China’s coming clash with economic reality

Jim O'Neill October 25, 2022 10:46

Judging by the reporting from the Communist Party of China’s 20th National Congress, Xi Jinping, newly anointed to an unprecedented third term as president, is tightening his political grip and strengthening the CPC’s control over society. Can successful economic development continue in this environment?

I have been thinking for many months now that one day, I would wake up to read that China was revisiting its zero-COVID strategy, overhauling the CPC’s interaction with domestic private business, truly reforming the country’s hukou system of residence permits, and rethinking crucial aspects of its Belt and Road Initiative (BRI) and its recent tactical stance on international governance. It is proving to be a very long wait.

At a meeting with a senior Chinese official a few months ago, I jokingly said that my 30-plus years of “understanding” China may have been a fluke, because I couldn’t comprehend some policies the country had adopted in recent years. The only way I could rationalize them was to conclude that they must be part of some tactical maneuver to neutralize factions within the CPC’s upper echelons ahead of the Congress. Judging by who the Congress has chosen to be next to Xi in the new leadership, there have certainly been further purges of opponents – and very few signs of a reversal of the policies of recent years.

Unless the post-Congress days and weeks produce a big surprise, I see growing dilemmas emerging for Xi and the CPC.

In the BRICs analysis (the purported rise of Brazil, Russia, India, and China) that my then-colleagues and I produced a generation ago, the decade 2021-30 was supposed to be when China’s economy closed in on the US in nominal terms. This was why the BRICs economies collectively might go on in the next decade to become larger than the G7, which would of course represent an enormous change to the modern world order.

This assumed that countries would achieve their long-term potential productivity rate, because Chinese GDP growth would decelerate as its labor-force growth peaked, implying that most of the 4.5-5% GDP growth we had assumed would reflect productivity gains. This growth rate is consistent with what China has stated is both required and desired to double its GDP per capita by 2035 from the 2020 level.

But the last three years suggest that China is unlikely to achieve this target unless it reconsiders its current policies. Virtually all scientific evidence suggests that it is impossible to eradicate COVID-19. The only plausible way to manage it is with proven vaccines. Chinese leaders’ fear that abandoning the zero-COVID policy would overrun the health system and cause mortality to rise is understandable, but the policy is entirely inconsistent with the path to the 2035 goal. It has been clear for some time that China can achieve its goal only if Chinese consumers become a central part of the country’s growth model. Rolling lockdowns make this virtually impossible.

Surely the time has come to import the best Western vaccines and change course. Among other benefits, such a step would send a powerful signal to the rest of the world that China wants to open again. In such a scenario, there could even be a reversal of the ongoing economic decoupling between China and Western countries, as well as of the growing difficulties surrounding most global governance bodies, such as the G20, the World Health Organization, the International Monetary Fund, and the World Bank.

COVID-19 is hardly the only policy area in need of rapid reform. In particular, the authorities must address the growing signs of a vicious circular weakening of the housing market and construction, as well as the lack of success of Xi’s signature BRI.

I hope these words will be read as constructive criticism from someone who saw China’s potential over 30 years ago and imagined a world where it could become the biggest economy. Back then, I thought this would benefit not only China, especially its citizens, but also the rest of us.

This month, the US National Bureau of Economic Research (NBER) published a study, “The Future of Global Economic Power,” looking all the way to 2100. It follows an analytical framework very similar to that of our BRICs analysis, and its main scenario still concludes that China will become the world’s largest economy by the end of the century, with another BRIC country, India, in second place. But there are two other scenarios with less favorable paths of productivity growth. In one of them, India, not China, is the world’s largest economy by 2100. And in the second, productivity falls short of the path of the past three decades, as it has in recent years, and China’s share of global GDP declines notably.

One can only hope that whoever Xi surrounds himself with in the coming years takes the NBER report to heart.

Copyright: Project Syndicate
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Jim O'Neill

Jim O’Neill, a former chairman of Goldman Sachs Asset Management and a former UK Treasury Minister, is Chair of Chatham House.