By Paolo von Schirach
President, Global Policy Institute; Professor of Political Science and International Relations at Bay Atlantic University, both in Washington, DC
How big is the China challenge to the West? Maybe not so overwhelming as we thought; but still huge. We know that the incredible decades of China’s relentless 10 per cent a year GDP growth are long gone. The widely anticipated overtaking of the U.S. economy is not taking place any time soon. Maybe it will never happen. That said, the question is whether China did not just slow down, but instead hit a wall. If this were the case, could we conclude that the re-engineered Middle Kingdom managed by China’s Communist Party peaked at the beginning of the new millennium and is now stagnating?
According to many analysts, China’s mediocre economic performance is the main evidence of this new disappointing reality. And the “real data” could paint a much worse picture. Indeed, since China routinely inflates its economic numbers, the real rate of growth for 2023 is certainly well below the official 5.2 per cent declared by Beijing. The reason for cheating is obvious. GDP growth in China is a political number, a key indicator of the unbeatable ability of the Communist Party –the all-knowing steward of China’s irresistible growth– to lead the country to its well-deserved global leadership goal. The real rate of growth could be as low as 1 per cent. May be higher; but certainly not 5.2 per cent.
That said, it would be foolish to dismiss the enormous progress made by China since the early 1980s when Deng Hsiaoping began economic liberalization. Thanks to decades of spectacular growth, hundreds of millions Chinese got out of poverty, achieving middles class status. Some became very wealthy. A few became billionaires. A non-entity just a few years ago, Huawei is now a giant telecom conglomerate.
Beyond that, today China is investing a huge percentage of its national wealth in R & D, while aggressively funding cutting edge new technologies, some of them with clear military applications. Beijing’s defense spending has increased dramatically. The Chinese navy is now larger than the U.S. navy. And here the same cooking of the books applies, only in reverse. For the time being, China paints itself as a peaceful nation interested only in engaging other countries on the basis of equal partnerships. Advertising a major military build-up, with massive defense spending increases, year after year, would create uneasiness around the world, contradicting this soft image.
Furthermore, with the Belt and Road initiative and its ambitious regional infrastructure building program, China created a web of deep relationships with Central Asia and beyond. Besides, Chinese companies are now everywhere in Africa where they build infrastructure, provide loans, while getting strategic mining concessions. At the same time, Beijing expands its political influence across the African Continent.
And do not forget China’s quasi monopoly on rare earth minerals processing and on the manufacturing of solar panels, not to mention its ability now to roll out millions of cheap electric vehicles, this way flooding foreign markets.
However, China also displays major systemic weaknesses. The real estate sector –30 per cent of GDP– is an unmitigated disaster caused by perverse incentives. Local governments used to get revenue by awarding land concessions to developers. They built on it and sold condos to eager buyers who kept buying because in China real estate is considered a safe store of wealth. This led to a fantastic bubble, now burst. As a result, millions of Chinese lost their savings, hundreds of developers are bankrupt and local governments lost a major revenue source. Low interest rates and other incentives rolled out by Beijing are not working. There is an extraordinary inventory of empty, sometimes half finished, buildings all across China.
Furthermore, China is experiencing a sharp demographic decline. This is hardly unique. But, unlike Japan or Germany, China is still a low income country, with limited public welfare programs. As couples must take care of two sets of elderly parents, the financial burden on families becomes huge. Hence a new disincentive to have children and consume more. Too expensive. Hence an anemic economy and worsening demographic decline.
In the end, China presents a contradictory picture. Enormous technological progress, combined with signs of systemic stagnation. Since China is still openly pursuing hegemonic goals, it is prudent for the rest of the world to keep an eye on the Middle Kingdom and be ready for all contingencies.