China Slows Down, and Grows Up
MORE than half of Americans think China is already the world’s leading economy — an astonishing misperception, given that China’s gross domestic product is still less than half of America’s. As George Orwell once observed, “Whoever is winning at the moment will always seem to be invincible.” China has grown at a breakneck pace for so long that its aura of invincibility has grown to outsize proportions in the Western imagination.
Now, however, there are signs that China’s growth is slowing to a rate that is ideal for the interests of the United States: fast enough to remain an important pillar of global economic growth, but not fast enough for China to remain a disruptive threat to American power.
The news of a slowdown in China, which just posted its worst quarter since 2009, has reignited the debate over its future. The consensus remains bullish, and is captured in the latest forecast by the International Monetary Fund, which expects China’s G.D.P. to continue growing at an annual rate of around 8 percent for five more years. A bearish minority, however, reads the warning signs — labor unrest, a housing bubble, an unprecedented investment binge — as a sign of impending collapse. Neither side has got it right. In fact, China has reached a stage at which all “miracle economies” have slowed significantly, but not disastrously.
It is well known that developing nations hit a “middle-income trap,” and stop catching up to rich nations, when per-capita income reaches about $5,000 to $15,000 (in current dollars). The examples (Brazil, Mexico, Malaysia) are numerous. What is less known is that even those rare economies that broke through the middle-class trap started to decelerate — still catching up, but more slowly — after reaching a per capita income of around $5,000 (in current dollars). Japan in the 1970s, Taiwan in the 1980s and South Korea in the 1990s all slowed from a growth rate of about 9 percent to around 5 percent, simply because the bigger the economy, the harder it becomes to grow fast.
China passed the $5,000 per capita income level last year, and is now showing the same signs of deceleration that Japan, Taiwan and South Korea exhibited at that level: rising labor demands for higher wages and a decreasing demand for new investments. China’s growth model is similar to Japan’s in the 1970s, and the most likely scenario is that China will follow the path of Japan in that decade, when its growth rate slowed to 5 percent. China will continue to catch up to the United States, but its growth will slow to a pace of around 6 to 7 percent over the next 5 to 10 years. At that point, China’s economy will be even larger, and may decelerate again.