Several economists expect that China will avoid a Japan-style stagnation — if the right policies take effect.
In the second quarter, China’s GDP barely rose, while Covid lockdowns slowed growth. These limitations are no longer in place. Despite this, the government is awaiting a meeting of policymakers at the end of the month to discuss Covid regulations. However, even if Covid limitations are relaxed, experts believe that China still has significant development potential in the coming years.
For one, the country’s income levels — and theoretically spending — have much room to grow. China’s per capita GDP in 2021 was less than a fifth of that in the United States, and adjusted net national income per capita was about one-seventh of that in the United States, according to World Bank data.
Macquarie’s China economist Larry Hu predicts China will keep growing between 4% and 5% over the next five to 10 years, given the country’s current catch-up status. China’s ability to transition from depending on investment to consumption for growth could have an impact on his projections, he added.
China’s plan to unify business standards and access within the country is another area of opportunity, according to Dan Wang, chief economist at Hang Seng Bank China in Shanghai. “Once these barriers are removed,… income can increase significantly.” She mentioned how current custom can favor a company from a nearby city over one from a different province. She cited this year as a glaring example of regional biases when different Covid rules among provinces led to inefficiency.
Wang stated that demand from abroad and an increase in manufacturing investment in China could support growth in the coming years.
Much of the country’s official economic narrative has emphasized the “unexpected” impact of Covid and the “Russia-Ukraine conflict” while pointing out that inflationary pressures in countries such as the United States are significantly higher.
According to Michael Pettis, a finance professor at Peking University, “China’s version of Japan’s imbalances is even more extreme,” making it more difficult to rely on consumption for economic growth. As a result of the bursting of a stock and real estate bubble in the 1990s, Japan’s economy has stagnated, generally growing more slowly than the U.S. and China.
During the 1970s and 1980s, Japan grew rapidly due to an increase in exports and infrastructure investment, but by the early 1990s, the country was investing more in wasteful projects, according to Pettis. According to him, Japan has been unable to rely on its consumers to drive economic growth, primarily because the manufacturing sector has been unable to accept the necessary transition to higher wages.
Pettis wrote in April that China will not necessarily follow Japan’s path if China can make substantial changes to its political institutions. The most likely scenario, he said, is that China will not experience a financial or severe economic crisis, but rather “face a very long period of low growth similar to Japan.”
Pettis estimated that China’s GDP would grow by no more than 2 or 3 percent annually in the coming years if nonproductive investment — primarily in infrastructure and real estate — is reduced without being replaced by an equivalent source of growth.
Due to China’s zero-Covid policy, many investment banks have lowered their GDP forecasts for this year to below 4 percent.
Xu Hongcai, deputy director of the Economics Policy Commission at the China Association of Policy Science, stated, “Economists cannot resolve this issue.” According to a CNBC translation of his Mandarin remarks, this is the case.
Xu expressed pessimism, noting that monetary policy and fiscal policy may contribute little, and that expanding their scope would only exacerbate long-term issues.
This month has also seen a resurgence of problems in China’s massive real estate market, with many homebuyers refusing to pay their mortgages until developers find the means to complete apartment construction.
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