China’s economy will surpass the United States?

Last Updated on April 1, 2024 9:17 am

Since China began liberalizing its economy in 1978, the country’s gross domestic product, or GDP, has been growing at an average annual rate of more than nine percent. The country, which has become the driving force of global growth, only grew by 2.2 percent during the 2020 pandemic, China’s lowest growth record in decades.

However, the country’s economy turned around the following year and recorded a growth of more than eight percent. But in 2022, China’s growth slowed again. That year the country’s growth was only three percent.

China then entered the long-term low growth? What is actually happening in the country’s economy? BBC has published a detailed report on this. It is presented for the readers of Dhaka Mail-

What is happening in China’s economy?

Last January, China announced that the country will achieve growth of 5.2 percent in 2023. China ranks second only to India among the world’s top economies in terms of growth rate. Although China’s economy is five times bigger than India’s.

But common people inside the country see it differently. 2023 saw the first foreign investment out of China in the last five years. The youth unemployment rate hit a new record, more than 20 percent higher than in June last year. Apart from this, the share market prices also collapsed at the beginning of this year, which is the lowest in the last five years.

In this situation, a small number of angry Chinese people have been seen for most of the last year taking to the social media Weibo account of the US Embassy in China to talk about their country’s economic slowdown.

One of them applied for help stating that he was unemployed and in debt for a long time. Another social media post talked about the stock market’s losses. There they are asking the US government to “give us some missiles so we can blow up the Shanghai Stock Exchange.”

However, Western media reports say that most of those comments have since been deleted. Lin Song, Chief Economist of the Greater China Region of International Netherlands Group (ING), a multinational bank based in the Netherlands, said that one of the reasons why China’s economy is moving relatively slowly after the corona epidemic is that the country, like many other countries, has adopted an ultra-aggressive policy to increase economic growth. did not

Many countries, including the United States, have implemented special rehabilitation plans to compensate for the economic damage caused during the Corona pandemic. A $1.9 trillion plan was adopted in the United States to help the nation’s unemployed population, small businesses, and state and local governments during the coronavirus pandemic.

On the contrary, explaining what happened in China, Song said that the monetary policy in China was more restrictive then. As a result, inflation has not become much of a problem for China. However, the country’s economic recovery process has been quite weak.

Many Chinese have paid for housing that has not yet been built, or is not fully finished. Wang Tao of investment bank UBS, however, pointed to another major reason behind the current slowness of China’s economic recovery.

He says China is going through the worst period in its history considering the housing downturn. Housing accounts for more than 60 percent of China’s household wealth. But when house prices fall, people don’t have the confidence to spend in this sector, especially the middle class. A major proof of this is that the use of large household appliances has decreased significantly.

These problems in China’s housing sector are having a major negative impact on the country’s economy. Because one third of China’s economy is dependent on this sector. Since 2021, this sector is going through a major financial contraction. Because that year, Chinese authorities reduced the amount of lending to large companies associated with the housing sector.

Over the years, China’s housing entrepreneurs have raised funds for their new projects by either taking out bank loans or issuing bonds and selling homes to buyers before construction. In many countries around the world, real estate agents are following this business model. But Chinese businessmen became overly dependent on borrowing. Even in recent years several large companies in this sector have been seen defaulting on their loans.

Many Chinese made down payments to buy houses from these housing dealers. However, most of the houses are either under construction or not yet completed. Many buyers poured their life savings behind those houses. They now fear that money will die.

China only achieved 5.2% growth in 2023
China only achieved 5.2% growth in 2023

China’s local governments, which previously borrowed billions of dollars to build infrastructure and relied on land sales to generate revenue, are also under pressure. According to the International Monetary Fund, their debt has now reached 92 trillion yuan, or $12.6 trillion, equivalent to 76 percent of China’s 2022 economic output.

However, Tianchen Xu, a senior economist at the country’s Economist Intelligence Unit, says China’s economy is not in crisis at all.

He believes that the debt program has led to rapid expansion of China’s infrastructure sector and high economic growth over the past decade. Tianchen said that China has now moved away from that model to balance itself and this revision was inevitable.

He further said that the matter is like a gigantic machine, which is tired from running and several cracks have started to appear in its various parts.

Will China’s economy overtake the United States?

When China became the world’s second largest economy by GDP in 2010, it was predicted that the country would soon overtake the United States. Most even believed that the event was only a matter of time.

A major reason behind this belief was the remarkable economic expansion of the country. The country was at the top in terms of economic expansion for two consecutive decades until 2010. China recorded double-digit annual growth in two periods, from 1992 to 1995 and from 2003 to 2007.

Before the current economic downturn began, it was predicted that China would overtake the US economy by 2028. Even those who were less optimistic were predicting that the country would overtake the United States by 2032.

But despite the current economic uncertainty, can China still do that? Professor Li Cheng, founding director of the Center on Contemporary China and the World (CCCW) at the University of Hong Kong, said yes, but not in a few years.

China recently hit a new record unemployment rate

China recently hit a new record unemployment rate

Professor Lee previously served as the Head of the China Center at the Brookings Institution in Washington, DC. Tianchen Xu, a senior economist at China’s Economist Intelligence Unit, however, mentioned a more specific time frame in this regard.

He said, China will be able to fulfill this goal in 2040s. Explaining the matter, Professor Lee says that by the end of this year, the United States is going to face several uncertainties, including the outcome of the presidential election.

Professor Lee said it is not an easy journey for the United States. There are many other uncertainties facing the country, including fearsome political partisanship, racial tensions, immigration policy, which must be taken into account.

He also said, in this regard, some new opportunities have been created in front of China. For example, the country has become the leader in the electric car manufacturing industry within a few years, which has surprised many people. But the bad news for China is that the country’s aging population is growing. The United States is under less pressure than that. Because their birth rate is higher than China. Moreover, immigrants are also playing a role in the country’s workforce.

However, Professor Andrew Mertha, director of the SAIS China Global Research Center at Johns Hopkins University in the United States, believes that China’s leaders may be hesitant about overtaking the United States. He said, considering the economic risks, China may not want to overtake the United States.

Professor Mertha also said that China’s current situation, with low growth rates, a housing crisis and a shake-up of the global supply system, seems to indicate that the country’s leaders want to be somewhat risk-averse. Moreover, they are not very interested in taking bold economic initiatives to challenge US hegemony.

What are the consequences for China?

Asking this question often brings up the subject of the ‘lost decade’. A “lost decade” basically refers to a predicted long period of economic stagnation. Song believes that a crisis of confidence and its response is dragging China’s economy back.

Lack of confidence is reducing investment and consumption in the country. As a result, the profits of corporate organizations are decreasing. Due to this, property prices are falling. And because property prices are low, people don’t have the confidence to invest. The whole thing is happening pretty much like this.

The crisis in China's housing sector has cast a dark shadow over the world's second largest economy

The crisis in China’s housing sector has cast a dark shadow over the world’s second largest economy

Song said a balanced policy is needed to break out of this cycle.

Many fear that Chinese President Xi Jinping may launch an attack on Taiwan to address internal discontent caused by the economic slowdown. China views self-ruled Taiwan as a breakaway province and believes it will gradually come under Beijing’s control.

Professor Mertha thinks it would be foolish for China to attack Taiwan. Professor Li warns that policymakers in China, the US or Taiwan who want to start any war against Taiwan should consider it carefully. Because this war will be different from the Ukraine war.

This could be the first artificial intelligence technology war. It will be an all-out high-tech machine-to-machine battle, said Professor Lee. He also said that Taiwan is definitely a key issue for China. But the Chinese leadership also recognizes that war as a strategy will be their last resort. And economic stagnation as a reason is not enough to start this war.

How will China’s recession affect the world economy?

Tianchen Xu, a senior economist at China’s Economist Intelligence Unit, believes that China’s current economic slowdown will affect the world in three ways. They are: commodities, Chinese tourism and geopolitics.

Many fear that Chinese President Xi Jinping may launch an attack on Taiwan to address internal discontent caused by the economic slowdown. China views self-ruled Taiwan as a breakaway province and believes it will gradually come under Beijing’s control.

Professor Mertha thinks it would be foolish for China to attack Taiwan. Professor Li warns that policymakers in China, the US or Taiwan who want to start any war against Taiwan should consider it carefully. Because this war will be different from the Ukraine war.

This could be the first artificial intelligence technology war. It will be an all-out high-tech machine-to-machine battle, said Professor Lee. He also said that Taiwan is definitely a key issue for China. But the Chinese leadership also recognizes that war as a strategy will be their last resort. And economic stagnation as a reason is not enough to start this war.

How will China’s recession affect the world economy?

Tianchen Xu, a senior economist at China’s Economist Intelligence Unit, believes that China’s current economic slowdown will affect the world in three ways. They are: commodities, Chinese tourism and geopolitics.

First, since China is a major importer of goods for the world market, a slowdown in the country means a drop in demand for goods, especially iron ore and bauxite that are used in construction. Secondly, destinations that are frequented by Chinese tourists will suffer. As a result, it will be difficult to bring their business back to the pre-corona epidemic situation.

Third, an economic slowdown will make it difficult for China to provide official aid or loans to other countries, especially if there is a crisis within China, especially in public funds.

China launched the Belt and Road Initiative (BRI), a series of investment and infrastructure projects to assert its global presence over the past decade. In this regard, they have already signed agreements with 152 countries and have invested in more than 3000 projects.

But some critics cite it as a debt trap for China. They note that China has emerged as a major lender to many low- and middle-income countries through the BRI project. According to a 2022 World Bank report, China is now the largest bilateral lender to the Maldives, Pakistan and Sri Lanka.

However, in March this year, China’s National People’s Congress (NPC) session reported that President Xi Jinping has significantly reduced investment commitments. This suggests that China’s large-scale investment abroad may not be very sustainable in the face of an economic slowdown.

But Song stressed that despite the ongoing slowdown, China will still be able to play a major role in achieving global growth because of its sizeable economy. “China is likely to contribute 20 percent or more to global growth over the next five years,” Song said.

Can China rise again?

Song believes the next step for China is to successfully complete the economic transformation necessary to achieve higher growth. The two sessions (of China’s National People’s Congress) showed that policymakers are now focused on larger and longer-term priorities that will determine whether China can move forward.

Xu suggested that the key now is for China to deal with the housing crisis more responsibly. Second, the Chinese economy should not only focus on the supply side, but also on the demand side.

He also said, “China should open more sectors of the economy to private and foreign companies. After more than a decade of fiscal expansion, fiscal reform measures should be taken to ensure long-term sustainability of public finances.

Song believes that the Chinese leadership will now focus on achieving the five percent GDP growth target set by the National People’s Congress (NPC). While we have seen modestly more accommodative fiscal policy targets, we wonder what kind of more stimulative policies can be adopted in the days ahead to achieve the 2024 target.

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