China’s economic growth rate this year is lagging behind the rest of Asia for the first time since 1990. This World Bank forecast, if it materializes, not only signals a cooling in global wealth creation. With President Xi Jinping set to be nominated for a third term by a Communist Party congress starting next weekend, it also challenges Beijing to find new sources of propulsion for the world’s second-largest economy.
China has suffered slowdowns in the past, but this time its defining problems are structural. While the country’s controversial “zero-Covid” policies have dealt a heavy blow, longer-term vulnerabilities stem from the cratering property market and growing stress on local government finances. Even after an expected post-Covid upturn, these frictions in the economy are likely to persist. They are accentuated by a rapidly aging society and a birth rate that has fallen by around 45% between 2012 and 2021.
Similarly, a backwash of the great tides of rural-urban migration that fueled China’s manufacturing boom is destroying the city-building momentum. Inefficiency in the allocation of capital is diminishing the returns to deploying a broad pool of national savings. And while China’s role in international trade remains strong, US sanctions on trade and technology could affect its competitiveness over time.
All these problems are, to some extent, structural. They portend an economic future that may be very different from China’s past three decades. If the World Bank’s forecast of 2.8% growth this year is confirmed, it will represent a sharp reduction from Beijing’s official target of 5.5%. It could also portend significantly slower long-term growth rates.
The conventional wisdom has long been that the solution is for China to target increased consumer spending. Doing so will require more redistribution to poorer and middle-income households, and leave them with more disposable income to spend, in part by reducing the factors that drive them to save a large share of their income.
The high level of savings by Chinese households is one of the reasons for China’s high gross domestic savings rate, which stands at 44 percent of gross domestic product compared to an average of OECD of 22.5 percent. The reasons that lead families to disappear more than in almost any other country on earth are telling.
The collapse of the state economy in the late 1980s broke an “iron rice bowl” of housing, health, pensions and other benefits, instilling a sense of insecurity. The hundreds of millions of workers who have migrated from farms to factories in recent decades do not qualify for city welfare benefits, forcing them to save. The one-child policy, introduced from the 1980s, meant that parents could not hope to rely on an extended family in old age.
These tensions, combined with underfunded state pensions, the spiraling costs of education and medical treatment (exacerbated by hospital corruption) reinforce the austerity mentality. This is limiting consumer spending, especially when most asset values are falling along with real estate prices and stock indexes. Building a more sophisticated financial system could ensure that even a less gargantuan amount of savings would finance more productive investments.
If China is to put growth on a more sustainable footing, it must empower its consumers. In particular, Beijing should allocate significant fiscal transfers to state pension funds for both urban and rural dwellers. This will cost a lot. But if Xi is serious about creating “common prosperity” for future generations, he should make it a priority.
