China’s Growth Shock

Apr 12, 2024

Whether it is a race car or an economy, deceleration is all relative. If a sleek, high-performance race car slows abruptly from a speed of 200 miles an hour to 50 miles per hour, a passenger without a seatbelt might be thrown through the windshield, Similarly, for an economy that had been experiencing hyper growth, a slowing to modest growth might feel equally stressful.

That was certainly the case for Japan. The Japanese economy was Asia’s first post-World War II growth miracle. Over the forty-five years from 1946 to 1990, it grew at a 7¼% average annual rate, taking its PPP-based share in the global economy up three-fold from 3% of world GDP in 1950 to 9% by 1990. Since then, over the thirty-two years from 1991 to 2023, Japan’s real economic growth has averaged just 0.8%, a 6.4 percentage point deceleration associated with more than three “lost decades” of near stagnation.

China has not slowed that dramatically—at least not yet. Over the thirty-two years from 1980 to 2011, Chinese real GDP growth averaged 10%, as its PPP-based share of world GDP increased nearly six-fold from 2.3% to 13.6%. Over the twelve years since, from 2012 to 2023, China’s real economic growth has slowed by nearly four percentage points to 6.3%—a meaningful deceleration but one that stops short of the Japanese downshift.

But that is only part of the story. Over the next five years, from 2024 to 2028, the IMF’s baseline forecast calls for a further slowing in average Chinese economic growth to 3.8%. That would represent a 6.2 percentage point deceleration from the earlier hyper growth experience, little different from the 6.4 percentage point deceleration of Japan.

In one critical sense, this comparison is nothing short of astonishing. Separated by just thirty years, a mere blink of the eye in the long annals of economic development, almost identical decelerations are evident in Asia’s two major growth engines—Japan and China. In the case of China, the final stages of this deceleration are more in the future rather than a done deal, as in Japan. But in one critical sense the final destination is the same for both economies—more than a six-percentage point deceleration in underlying economic growth.

Yes, there is a big difference between the roughly 1% growth trajectory of Japan’s lost decades and the nearly 4% steady-state growth that IMF is currently projecting for China over the next five years. In absolute terms, the Chinese growth outcome  is far more impressive than the near stagnation of the Japanese economy. But the point I am trying to make is in relative terms. On that basis, the forecast for China captures a growth slowdown from its hyper-growth era that is every bit as dramatic as that which has afflicted Japan. Passengers in both economies are likely to fear the proverbial windshield as they feel the full force of this sharp deceleration.

There is another important difference between the two slowdowns. This shows up in the per capita GDP comparisons that measures the standard-of-living contrasts between the two economies. When Japan entered the first of if its lost decades, its PPP-based GDP per capita averaged $34,102 in the first half of the 1990s (in 2017 international dollars). By contrast, if the IMF forecast in on the mark, the coming growth deceleration is about to afflict China when its PPP-based per capita GDP is projected to average $21,506 over the 2024-28 period (also in 2017 international dollars). That means that on a per capita basis, Japanese citizens, on the brink of their lost decades, enjoyed living standards that were nearly 60% above those expected for the Chinese people at the dawn of their expected slowdown.

In other words, Japan entered its lost decades era as a much wealthier, more developed society than is likely to be the case for China. This hardly comes as a surprise to Chinese experts and academics. Professor Cai Fung, Director of the Institute of Population and Labor Economics of the Chinese Academy of Social Sciences famously warned in 2012, “There is no doubt that China will be old before it is rich.” If the IMF’s forecast comes to pass, that prescient warning is likely to ring true.

Of course, there is much more to China’s Japanization comparison that sharply decelerating growth trajectories. I have written a good deal about this over the years and there is a detailed assessment of this possibility in Chapter 4 of Accidental Conflict. Suffice it say at this point, that while China’s deflation and property market distress fall short of Japan’s experience, and its equity market correction is of a much shorter duration at this point in time, other metrics flash more worrisome warning signs—especially China’s overall debt intensity, zombie incidence, demographic pressures on the working age population, and, perhaps most critically,  a weakening in total factor productivity.

Bottom line: while the jury is still out on whether China will be the next Japan, there is no lack of incriminating evidence. The comparative growth decelerations between the two economies is more than just an idle curiosity. The loss of more than six percentage points of real GDP growth after protracted periods of hyper growth in both Japan and China is not a coincidence to take lightly.

History tells us that large growth shocks tend to change everything. Gone are the carefree days of let it rip, anything goes, nothing can go wrong. Growth shocks force a collective realization that the easy days are over. Growth shocks typically prompt the bursting of asset bubbles, the recognition of policy blunders. Growth shocks also lead to a loss of confidence that can feed on itself, a development that is very much at work in China today. Ultimately, growth shocks are a slap in the face after the seduction of hyper growth. For China, steeped in denial, that has yet to sink in.

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