Can China still become the world’s largest economy? | Business Beyond

it's the most impressive economic success story of our time but today that success looks shakier than ever in the last 20 years China climbed the world's economic ranks it managed the fastest sustained growth of any major economy ever recorded now its size remains second only to that of the United States China's rapid rise propelled predictions that it will soon become the world's largest economy now the country's Outlook is clouded for the first time in two decades China's economic output will fall behind that of the rest of Asia a growth slowdown is prompting many experts to reconsider when China could overtake the US and if it ever will in this episode we will look at the issues underlying China's cooling economy the lifting of covid does not necessarily change or solve China's economic structural problems it's hard to maintain Dynamic growth when your labor force is shrinking if you're trying to export to the rest of the world and domestic demand remains very weak I really think that puts a limit to your growth fundamentally we will assess the international factors threatening growth the external environment in China is really as bad as anybody could remember it since the era of Mount zitong and we will be asking can China still become the world's largest economy and China is still the world's largest exporters still the world the world's largest manufacturing center and a domestic Market is huge so if China does not make it that's the point to overcome or or surpass the U.S before 2027 or 8 it will never do that's all coming up on business Beyond in 2010 China's GDP growth stood at an impressive 10.6 percent since then the pace of expansion has slowed down according to IMF forecasts its GDP growth will continue a trend of decline even after the pandemic in the coming years it expects growth to hover below 5 although some forecasts are slightly more optimistic one big factor affecting the pace of economic growth is the zero covet policy that dominated life in China for the past three years While most countries around the world began winding down their pandemic measures in 2022 China tightened its grip at the moment the Chinese economy the the growing rate the growth rate is not um very high but there are several reasons behind it to the most biggest the biggest reason is the pandemic Draconian measures to contain the virus sapped domestic consumption crippled small businesses and kept China's factories closed they also eventually prompted the most widespread anti-government protests in decades in December 2022 the Chinese government rolled back the controversial policy releasing its grip on the economy but many analysts believe that the end of zero covered in China won't signal the Revival of economic growth as we know it the lifting of covid does not necessarily change or solve China's economic structural problems to look beyond the short-term issues and understand the underlying factors stunting economic growth in China it's worth revisiting how its economy boomed in the first place half a century ago China was reeling from 10 years of political and social chaos the so-called cultural revolution under Mao tsitung aimed to rid the country of any vestiges of capitalism but everything changed with the death of Mao tsitung and the eventual rise of Deng Xiaoping in 80s then shopping and his colleagues decided to send the China towards a different route compared to communist the Socialist period China was King to liberalize to open up to embrace the global market the country transformed cities factories and universities started filling up manufacturing technology and Entrepreneurship exploded China's middle class was thriving tank shopping's reforms woke up a dormant economic superpower you put all your children into primary school and secondary school you move labor from low productivity agriculture into higher productivity Manufacturing in urban areas and you do these kinds of things and if you if you're really good at doing them and you're very effective at doing them obviously the rewards are huge and they and they were in China's case China's fundamental reforms reconciled its economy with global trading rules and swung open the door to the World Trade Organization in 2001. China went through a extremely high speed growth after trying to joined the WTO during the six years following China's accession its annual GDP growth averaged an eye-watering 12 percent cheap labor and its integration into the world economy fueled China's rise it became the biggest Global exporter the economy went up really fast until the point 2008 the global financial crisis happened China was not hit immediately but it was indirectly affected because the U.S market and the European market was heavily influenced export orders from Europe and the US dried up during the financial crisis so China began pumping more money into its own economy to create jobs that paved the way for one of the biggest threats the Chinese economy is facing today debt so from 2010 or 2009 until about 2020 until covid China went on this huge depths uh Jamboree um and um and really accumulated more depth than anybody could have predicted or would have expected the Chinese government shielded its economy with bricks and mortar and it worked China's investment boom maintained economic growth at close to 10 percent even after the crisis but propping up the economy with infrastructure Investments meant the government had to keep on building eventually you're going to have enough Harbors roads airports China's super speed Railway system illustrates its inefficient spending spree the country boasts the world's longest high-speed rail network but despite excess capacity in mounting Financial losses the network keeps growing even less populated locations where there isn't much demand now maintenance costs and interest payments have overtaken the railway's income they've over built local infrastructure so on the one hand if you travel around China it's very impressive that they have all these expressways High-Speed Rail airports but a lot of them are severely underutilized and some of it frankly are white elephants that are not generating a lot of additional economic activity from 2008 to 2021 more than doubled from 140 to 286 percent of GDP today China's total debt is three times the size of its economy much of that debt didn't end up on beijing's balance sheet but on that of local governments to pay for what Beijing ordered they relied on another debt-ridden sector in the Chinese economy real estate in order to raise money for beijing's plans local governments started selling publicly owned land to real estate developers the developers rushed to buy what was on offer inflating a giant housing bubble China had a property boom over a couple of decades which was you know massive it fueled a lot of optimism it fueled a lot of um really really bad risk-taking um property developers got into too much debt um households started on taking a lot of Mortgage Debt um it's a typical story especially in smaller Chinese cities housing construction started outstripping demand giving rise to China's so-called ghost cities today China has enough unoccupied Apartments to house the population of France with a mountain of real estate debt at risk of collapse the government tightened property restrictions but it all began to start to go wrong in about 2021 uh the government introduced regulations um that tried to limit the liabilities and constrained the balance sheets of property developers and what we got eventually was a bust in 2022 which the government has become frightened about because the consequences have been really really harsh um so uh hundreds of thousands of people own properties that can't be finished by the developers because they're busts and there's a lot of debt in the sector recent history has seen huge real estate developers like evergrad default now people's life savings are at risk banks are on the hook and local governments are drowning in debt now the local governments of course don't have means to get financing because of course land sales were the largest revenue but what do China's debt difficulties mean for its economic trajectory for many years we've argued that China cannot get into crisis you know I mean I've been saying this for many years that is nearly impossible for many reasons because China is very controlled the banks control blah blah blah and kind of virtual Circle everybody helps each other that's well the minute you start having too much debt so then you either have to issue more debt to just to service the interest payments um or you have to shrink expenditure and shrinking expenditure is very difficult in the middle of a you know Health crisis basically that's ongoing to reduce its giant deficit China's authorities will have to cut spending meaning they have to Veer away from the strategy that propped up its economy in the first place this will continue to be a drag to the Chinese economy because companies and governments they always have to service their debt whatever income they make they always have to you know pay interest basically and that limits the amount of investment um and also consumption consumption is another cloud in China's Outlook to wean its economy off of public debt and real estate the country needs to strengthen another economic engine demand Chinese consumers need to spend more but that's not what's happening harsh pandemic measures suppressed consumption for the past three years but zero covet isn't the only reason people in China are holding on to their cash nowadays China Chinese people save up for their future um because the public welfare scheme is still not covering the entire population China has one of the highest national savings rates in the world analysts agree that a big reason is a fragile social safety net once you retire don't know how how you are how you are going to sustain yourself and so on so forth right and when people get sick for those people who don't necessarily have good access to the Health Care System you are afraid to get sick because you cannot afford to go to see the doctor another reason consumers aren't driving enough growth in China is one we are already familiar with it problem for middle class is that on the one hand if you have to they are suffering from these arms race of um you know the competition of spending on their children education and on the other hand you also have to have a buy a house and a housing market is for a long period of time it's just so expensive housing is so expensive in China and that contributes a lot to uh be actually changed the Chinese Savers to Chinese household from Savers to actually very much indebted and the mortgage suppress now that paging zero covert policy is winding down many analysts say that alleviating anxieties around money is key to unlocking a new growth phase a lot of economists you know including Chinese ones even now are trying to say to Chinese government is that they need a U.S style or European style fiscal stimulus uh which primarily benefit the households you just transfer money to the households uh to you know give them additional spending power uh but up to this point the Chinese government has refused driving up demand comes with a price tag the Chinese government hasn't been willing to pay so far China has no physical room anymore China's public debt is very high and it is engaging in massive increase in military expenditure so the room for the welfare state for you know for for a kind of a you know room for consumption which is another important factor to support consumption um isn't really there and China is contending with another internal problem demographic change China is the fastest aging country on Earth not the oldest which is Japan but it's aging faster than almost any other country new births in China have fallen to record lows in earlier decades women had an average of 2.7 children in 2021 that number shrunk to 1.2 that significantly below 2.1 the rate needed to sustain the population size of a country in 2023 China's population fell for the first time in decades the United Nations projects that China will lose its status as the world's most populous country this year the one child policy imposed from 1980 until 2015 is one reason behind the demographic crunch but even though having more than one child is permitted nowadays many young people are still rejecting the idea of having larger families or any children at all but hey if women get educated women have a career they are their priority is not staying in the household and give birth to Children finally there is also the problem of raising a child is expensive you know raising Edge there are systematic studies showing that raising a child in big Chinese and cities are even more expensive in major cities in the west China's population is at a turning point with profound ramifications for its future During the period of its sharpest economic Ascent the country benefited immensely from a demographic dividend it had a massive labor force to staff its factories now the picture is shifting their labor force has peaked and is going to start shrinking it's hard to maintain Dynamic growth when your labor force is shrinking if shrinking population means there are fewer workers and having fewer workers drives up wages experts warn that because of this China will have a harder time feeding the world's appetite for cheap Imports well you would need to make the people who are still working more productive or you would need to use robots or something that is capital intensive a growing population of older adults will also put a strain on the country's already underfunded pension system and this means that the the burden of dependency of older people on the falling working age population is going to rise and this is normally associated with a more depressing sort of growth picture demographic change is a long-term phenomenon so the Chinese government still has room to respond it has already switched to a three-child policy which includes improved maternity benefits cheaper education and child care so far it hasn't yielded strong results the government can also potentially expand the um or delay the retirement age instead of having people to say hey how about you guys just return at the at the age of 50 or 55 you can extend that to 60 the same as a lot of Western countries China is steering towards a demographic dilemma but it could still take time before its shrinking population also shrinks economic growth at least in the short run the Chinese labor force is relatively robust and for those people who are the the pillar in the labor force are the you know the one child degeneration or you know the the uh 80 people who were born after the after you know 1980s right so these are still robust the labor force they are very much skilled and they are a higher quality labor compared with the earlier generation it's not just what's happening within China's borders that's threatening economic growth the international environment that enabled its economic eruption is shifting for the last 20 to 35 years China's increasing integration into the world's economic system and to become the world's biggest export country and the center of so many very very complex Supply chains this is this has really been the bread and part of the bread and butter of um as we say in English of China's economic explosion today as the world is facing an economic slowdown on surging inflation demand for Chinese products has decreased exports of goods and services as a percentage of Chinese GDP declined from 36 in 2006 to 20 in 2021. another important factor is that the world is facing a future defined more by separation than by integration the external environment in China is really as bad as anybody could remember it since the era of Mount zitong because of geopolitics export controls decoupling disengagement the world's two economic superpowers are wedged in a strategic competition that Trend was further exacerbated by the covid-19 pandemic which laid bare the Practical cost of codependence the United States has adopted a less friendly attitude toward China it's worried about China's rise as an authoritarian power trying to change the global order I think Europe is worried too but to less of an extent than the US is and concretely that leads to various restrictions that the U.S and Europe are putting on technology transfer to China trade and investment with China and all of that is going to slow down China's development in October of 2022 the U.S introduced a series of sanctions and regulations they don't just Target Chinese individuals and companies but aim to hamper an entire industry China is the largest producer of semiconductors in the world and they're used in many other products that the Chinese make automobiles for example and they are not technologically capable enough to compete with the real real top end of of tiny semiconductors but they produce a huge volume of kind of middle technology semiconductors and now the United States has put restrictions on the sale of the equipment that makes sophisticated semiconductors to China without semiconductors Advanced semiconductors you don't really have very much opportunity in the advanced kind of Technology sector how far economic interdependencies between the two countries will untangle is unclear but what is certain is that the environment which once LED China flourish is becoming more Cutthroat and is going to delay China's technological development it's going to make it very costly but could China eventually launch its own uh chip making manufacturing machines and could it make it Advanced chips I think China is still on the trajectory of developing its own capacity technological capacity especially that now that um you know a lot of China American Western trained scientists have went back to China in the beginning of this video we asked whether China is still on track to becoming the world's biggest economy the experts we spoke to described the superpower that has outgrown its economic blueprint one of the things which I think most International kind of economic Watchers agree on actually the Chinese government I think basically agrees with this too is that the development model which works so well for China during the 1990s and the 2000s really isn't working for them as well anymore so all this is to say bro but as an emerging economy China's rapid rise was driven by urbanization population growth and upgrades in manufacturing as these economic engines slow others need to be fueled so it's a natural process if I may say so that is basically unavoidable again this is like gravity countries when they develop they become I mean the growth of product not the level the level not the level the growth of productivity which explains economic growth starts to decelerate but animals also believe that policy makers hold the tools for a new kind of economic growth in their hands whether China will actually come back it depends on the policies depends on the government is providing enough support for small business whether the government is doing the right thing to um push for technological progress in the long run when the government is ensuring um the growth is sustainable is balanced China would benefit enormously if it could embark on policies that shifted the focus of growth away from investment in property and infrastructure and towards consumer spending and services China's economy is at an inflection point what that means for its power the world's biggest economy has analysts split so if China does not make it that's a point to overcome or or surpass the U.S before 2027 or 8 it will never do in my opinion because growth will not be strong enough China needs to use these years to really make it by 2027-28 they might if the US gets into a very big recession baby could China grow by number yes for sure but quality wise I think there are a lot of challenges I think it might still happen because the scale is still very big um China is still the world's largest exporters still the world the world's largest manufacturing center um and a domestic Market is huge as the country re-emerges from three years of zero covet rule its path to becoming the world's largest economy has become rockier beijing's next move could determine whether China finds a new steady course or stalls and that wraps up this episode of business Beyond if you like what you see here check out one of our other videos a good place to start would be our episode on demographic change goodbye and take care [Music]

Channel: DW News

Views: 1,405,500

Keywords: DW News, China, economy, boom, crisis, debt, real estate, tech, semi conductors, trade, decoupling

Id: maH4gy3tpiI

Length: 25min 35sec (1535 seconds)

Published: Wed Jan 18 2023